How Will An Interest Rate Drop Affect Property Prices?
In This Week’s How's The Market | Edition 84
How Will An Interest Rate Drop Affect Property Prices?
Some Agents Are Losing Listings Due To Challenging Market Conditions
A Majestic 1891 Kew Residence Hits The Market
How Will An Interest Rate Drop Affect Property Prices?
As we appear to be edging closer to the first interest rate drop with monthly inflation back in the RBA’s target band and many economists and the big 4 banks predicting an interest rate cut between November & March, the question on everyone's minds is what is going to happen to property prices?
It is widely assumed that interest rates and property prices are correlated, though many have been surprised to see how much property prices have increased across Australia amidst the sharp interest rate increases since May 2022.
It’s worthwhile to look back over the past 25 years to see how rising and falling rates have actually correlated with house price growth and falls when compared to the RBA’s cash rate target of between 2% - 3%.
When the cash rate exceeded 3% (15 years out of the last 25):
Property prices declined twice (with drops of 1% and 3%).
They increased moderately six times (by 1% to 10%).
They rose significantly seven times (by more than 10%).
So, in high-interest rate periods, property prices increased 13 times and fell only twice.
When the cash rate was below 3% (10 years out of the last 25):
Property prices fell twice (by 6% and 7%).
They increased moderately on six occasions.
They surged more than 10% in two of those years.
During lower interest rate periods, property prices rose eight times, falling on only two occasions.
These trends suggest that while high interest rates can temper property price growth, they don’t necessarily lead to declines. Similarly, lower interest rates often contribute to rising property prices, though occasional dips can still occur.
Whilst it is clear that interest rates are not a single defining factor that can predict property price growth and other factors such as supply, demand, population growth, building approvals and more are extremely important, interest rates can still have a large impact on the following two areas:
Borrowing Power : As interest rates drop, borrowing power increases and gives access to more capital. We typically see that people will spend to their maximum budget in most cases which can fuel higher house prices immediately after rate cuts.
Sentiment : One of the biggest impacts we expect to see on the market is an increase in demand due to a new wave of positive sentiment rushing through the market. As more people predict house price growth, people start to act as if house prices will continue to grow and then create a self-fulfilling prophecy as more people rush to get into the market.
Ray White’s economist Nerida Conisbee recently said the impact from the next rate cut could be even bigger than history dictated in some areas, and as little as a month away.
“If most people are expecting four cuts next year, that will change sentiment to be far more positive,” Ms Conisbee said.
Conisbee also said that Melbourne and Sydney were Australia’s most sensitive cities to rate cuts due to high house prices and would broadly see the biggest response.
We have heard from clients, friends and agents that many people are waiting on the sidelines for interest rates to drop so they can buy when they have an increased borrowing capacity.
My predictions are that the first half of next year will see a large surge in demand across Melbourne as interest rates drop and that this market will continue through the year.
What The Agents Are Saying
Lots of agents are still struggling to sell stock on any properties that are B & C grade.
I have inspected a few properties this week where agents have been told by their vendors that they are planning to take their properties off the market if they cannot sell them this week.
One particular apartment that backs onto a train line but is in a great suburb and location has had two price drops already, both of $50k and is now priced at $100k below a recent sale in the building. The vendors have told the agent they will not sell for any less and that if it’s not sold this week they will have to rent it out.
The agents have been surprised due to the low interest as it is already priced so low and have attributed the struggling campaign to too much competition and a lack of urgency from buyers.
This agency has said they are concerned for the rest of the year as they have a lot of stock coming up.
Agents that operate in the higher price points ($2m+) across the Stonnington & Boroondara LGAs have reported better success with the general theme being that finished homes in good streets are still attracting fierce competition and breaking records.
The Wow Factor!
896 Glenferrie Road Kew, VIC 3101
Talk about wow factor!
Check out this facade.
‘Comaques’, exquisitely majestic in stature and scale, has been a symbol of grandeur and prestige in Kew since its establishment in 1891.
Originally designed by the renowned Alfred White. This kind of home often stands out due to its unique design and architectural pedigree, and the blend of timeless sophistication with modern amenities can make it a highly desirable property for buyers or admirers of classic design.
This magnificent residence’s entry foyer leads into a refined formal lounge and an exquisite dining area, both featuring towering bay windows that invite natural light.
The striking flag tower stands as an awe-inspiring landmark, its towering silhouette demanding attention and offering a panoramic vista that captivates from every angle. Inside, the space is imbued with a sense of grandeur, where lofty ceilings soar above, enhancing the open, airy atmosphere.
Price Guide : $7,500,000 - $8,200,000
In The Media
International property giants and superannuation funds are investing in Australian builders and developments to capitalize on the country's growing housing market and residential property demand had been talked about in the above article.
The article states that Metricon, Victoria's largest builder, has nearly finalised a $115m deal to acquire 51% of Sumitomo Forestry Group.
Experts in the housing industry argue that international giants are attracting to the suburbs' housing sector, requiring substantial foreign finance increases to achieve these targets.
Meanwhile, one of the city’s biggest active development sites, the $2.8bn Melbourne Square project in Southbank, is being created by OSK a Malaysian firm headed by Ong Leong Huat, one of their nation’s 50 richest people.
Big building firms are expected to make it challenging for small and medium-sized builders to maintain their operations as they have been struggling to compete for the past decade.
Articles like this, I believe, have continuing negative impacts on the confidence of the Australian construction industry.
Final Thoughts
Whilst interest rates do not have a direct correlation with long-term house price growth, the impact on the change in sentiment can create a mini-boom as a surge of buyers currently sitting on the sidelines rush in to take advantage of the changing market.
Major economists have predicted that Melbourne will see a larger increase in value than other states when the cuts occur.
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.
