February Rate Cut: A Pipe Dream?

In This Week’s How's The Market | Edition 95

February Rate Cut: A Pipe Dream?
Where Luxury Knows No Bounds: A Majestic New Masterpiece
Australia’s housing market has just entered a downturn – what’s behind the shift?

Headline inflation has reached its fourth consecutive month within the Reserve Bank's target zone for interest rate cuts, but persistent core inflation is unlikely to prompt Governor Michele Bullock to react.

The Consumer Price Index Indicator figures show headline inflation has remained within the desired 2-3% range for over three months, marking the first time since 2021.

According to statistics from the Australian Bureau of Statistics, consumer prices increased 2.3% in the year ending in November. Although higher than the 2.1% recorded in October, it is still well within the goal, and the good news of a decline in the trimmed mean the RBA's preferred measure of play was also reported.

The measure reduces volatile price changes from 3.5% to 3.2% for the year to November, indicating positive news but still not meeting Ms. Bullock's desired sustainable inflation levels.

Anne Flaherty, a senior economist with the REA Group, told Mortgage Choice that it is not unexpected that household budgets are currently being squeezed from all sides. "I believe that's one of the main causes of the slowdown in the growth of real estate prices," she continued.

There will not be much more stimulus available from the RBA in 2025, given the lags associated with rate moves feeding through to activity. "According to Ms. Flaherty, one of the main causes of the slowdown and then reversal in home price increase in December was the prolonged high interest rate environment.

Although conservatism and prudence have continued to be prominent themes in the RBA's message, its most recent communications have shown a greater level of confidence in controlling inflation within the Australian economy.

What The Agents Are Saying

Mixed Signals.

Many agents are still on holidays and are overseas with a large majority expecting to return in the next week.

If you’re trying to reach out to agents because you missed out on buying a home last year, expect to receive many bounce back notifications on emails and a lot of your calls heading straight to voicemail.

Of the agents that do pick up, you may hear mixed signals.

Some of the agents we speak with are expecting strong Februarys with lots of their Oct/Nov prospecting paying off in the coming weeks, however, many agents have also said they don’t have nearly as much stock coming up as they would like.

Many have been hopeful that this year will be a big year for Melbourne, if interest rates come down and particularly the more affordable markets are expecting to see some strong returns.

Already, we are hearing of large groups going through open homes in some areas on the outskirts of the city, however, many inner city suburbs have still seen very little stock come on for the year.

Expect properties to start coming on from next week for Feb auctions.

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In The Media

Australia’s housing market has just entered a downturn – what’s behind the shift?

CoreLogic's national Home Value Index (HVI) has experienced a decline after 21 months of growth, which increased values by 14.3%.

The national index reached its peak in October, stabilizing in November (-0.01%) and experiencing a 0.1% decline in December.

Since June 2024, monthly home value growth has slowed, indicating the beginning of a cyclical downturn.

Any cyclical downturn in early 2025 is unlikely to be significant, as buyer and seller confidence will return when interest rates decline later this year. This is in spite of the market's recent expansion phase slowing in the second half of 2024.

Housing demand has slowed due to a growing income gap, slower economic growth, and higher interest rates, affecting the median Australian household's 'affordable' purchase price.

Historically, housing gaps have converged due to housing values dropping or purchasing capacity improving. For nearly two years, buyers less affected by interest rates may have sustained this gap, potentially waning demand.

The first significant decline in home values coincided with a slow season in the property market, with the seasonally adjusted HVI rising 0.1% in December.

In December, only five of Australia's 15 capital city and regional markets experienced declines, with Melbourne experiencing the largest drop at -0.7%, followed by Sydney, Canberra, Hobart, and Victoria.

Early 2025 may see a cyclical downswing, with home value declines typically shorter and smaller than periods of increase.

Part of this is because sellers may withhold property from sale until rising values, restricting supply during price falls. However, tight labor markets and current interest rate settings make forced sales unlikely.

Another reason this could be a relatively small market downturn is that a small market downturn in 2025 may be due to growth in real incomes, moderate inflation, and reduced interest rates, along with a shortage of homes and weak construction sector capacity.

Therefore, due to these considerations, the housing value decline is likely to be brief and superficial. However, until housing affordability and loan serviceability improve more significantly, it is difficult to anticipate any significant growth in housing prices, at least on a macro level.

Final Thoughts

Even while there is little probability of a rate cut next month, there is still a good chance that one will occur in the first half of this year.

We have been witnessing an upward trend in inflation.The main problem is that, despite a sharp decline in headline inflation, underlying inflation remains higher than the Reserve Bank would like.

The news will be unwelcome to millions of homeowners who have become accustomed to high mortgage repayments.

However, I think the rate cut is unlikely to occur until we witness the target range consistently moving into it.

If you or someone you know would like assistance to buy this year, book in a call and we can discuss if we can help.

Thanks for reading this far!

We value feedback and if you have any suggestions on what you would like covered in the future please email me at tristan@tomii.com.au

Happy Buying!

Note: This is general advice and does not take into consideration your objectives, situations or needs. Please consider if this advice is suitable for you and your circumstances and speak to a professional before making any financial decisions.

February Rate Cut: A Pipe Dream?