Key takeaways
Australia's largest lender, the Commonwealth Bank predicts interest rate cuts as early as late 2024, with other banks suggesting cuts in early 2025.
This would ease borrowing costs and could drive property market activity.
Historically, rate cuts lead to higher house prices, as lower borrowing costs increase buyer demand. Sydney, Melbourne, and Canberra have typically seen the biggest price jumps following rate cuts.
While rate cuts could boost property demand, high household debt and sluggish wage growth may temper the overall impact on house prices.
Housing undersupply, driven by population growth and limited construction, will likely add upward pressure on prices, especially in urban areas.
Affluent areas with higher income growth, particularly in inner and middle-ring suburbs, are expected to see stronger price appreciation. Outer suburbs with slower wage growth may struggle to keep pace, even with lower interest rates.
For property investors, this period represents a window of opportunity as falling interest rates, population growth, and a housing shortage combine to create favorable conditions.
However, success requires a well-planned investment strategy, focusing on investment-grade properties in high-demand locations.
With the prospect of a rate cut looming, many investors and homeowners are eagerly watching how the Reserve Bank of Australia (RBA) will move, and what the potential impact could be on house prices.
As we know, interest rates are a key lever in the broader economic environment, and when they shift, so do property markets.
Australia has been experiencing one of the longest tightening cycles in recent history, with multiple consecutive rate hikes pushing borrowing costs higher.
But now, the economic conversation has shifted.
While only a short while ago a rate cut seems increasingly likely as inflation pressures ease and consumer sentiment weakens - the latest strong employment figures suggest the first rate cut may not come till early 2025.
Of course, this raises the question: what will happen to the property market when interest rates start falling?
Why the RBA will cut rates
Before we dive into the potential impact on house prices, it’s important to understand the reasoning behind a rate cut.
The RBA uses interest rates as a tool to manage inflation and economic growth.
Over the last couple of years it is has raised interest rates to bring inflation back into its preferred band of 2 to 3%, and was doing this by dampening consumer and business confidence as well as consumer spending and by raising unemployment.
When inflation starts to cool and the economy shows signs of slowing down, the central bank typically lowers interest rates to stimulate growth again so we don't fall into recession.
A lower cash rate encourages borrowing, increases consumer spending, and aims to boost employment.
Right now, the Australian economy is facing mixed signals.
While inflation has been a concern, it’s now trending downwards.
At the same time, consumer spending is softening, business investment has plateaued, and wage growth hasn’t picked up as expected.
On the other hand the economy if performing strongly with more than 64,000 people found jobs in September, keeping the jobless rate unchanged at a revised down 4.1 per cent last month, even as the participation rate – the share of working-age people either with a job or looking for one – hit a record high of 67.2 per cent.
The combination of these factors creates an environment where a rate cut may not just be possible but necessary.
When Are Interest Rates Likely to Fall?
So the big question on everyone’s mind is: when will rates start coming down?
According to Australia’s largest lender, the Commonwealth Bank, we may see a rate cut before the end of the year.
This could be a major early Christmas present for homeowners and prospective buyers, as a cut in rates would immediately make borrowing more affordable.
However our strong economy supports the forecasts of both Westpac and NAB who are predicting cuts in February 2025, and ANZ Bank expects rates to start falling in May 2025.
Of course, this potential shift in interest rate policy is eagerly anticipated by many buyers and investors.
Lower rates would make mortgages more affordable, which could act as a significant catalyst for market activity.
For those sitting on the sidelines waiting for a sign to jump back into the property market, the forecasted rate cuts may be the green light they’ve been hoping for.
However, it’s important to note that just because rates are predicted to fall, it doesn’t mean buyers should wait around till they do.
Timing the market can be tricky, and the best strategy is to invest when the fundamentals are right for you, rather than trying to predict the perfect moment.
That said, if rates do fall in the coming months we can expect a renewed wave of confidence and buyer demand, pushing up property values.
The impact on house prices
So, how would a rate cut affect house prices?
Historically, there’s a strong correlation between falling interest rates and rising house prices.
Lower borrowing costs make it more affordable for buyers to take out loans, which usually leads to increased demand for housing.
When more buyers enter the market, competition for property rises, and so do prices.
As Nerida Conisbee, Ray White's Chief Economist, explains:
“When rates come down, people are willing to spend more on property, meaning they can afford to pay more, and we do tend to see property prices rise.”
There are many ways to calculate the impact and it is difficult to tease out what is the impact of a cut and what is the impact of other factors such as the lending environment, population growth, state based economic growth and construction costs.
However, we have looked at it very simply. What has been the impact on pricing the month after a rate cut previously? In particular when there hasn’t been a rate cut for some time.
In undertaking this analysis, we have looked at house prices for Australia, and by capital city and looked at what happens to pricing the month after a cut.
We have limited it to cuts that occur after at least six months of no movement. There have been four instances since January 2011 that this occurs - November 2011, February 2015, May 2016 and June 2019.
"The results are not surprising. Since January 2011, the city that has had the biggest jump following a rate cut has been Sydney, followed by Melbourne then Canberra.
All these cities are the most expensive in Australia and therefore it makes sense that they would be more sensitive to the cost of borrowing. Perth and Darwin saw no increase, reflecting relatively stagnant markets during this time but also their lower sensitivity to interest rate changes.
Would a similar occurrence happen this time around? It's likely to be slightly different, as they are every cycle.
Perth, and Brisbane are currently our strongest markets and although less sensitive to interest rates, are likely to get a further boost following a rate cut.
Sydney and Melbourne are comparatively weak, having seen falls in pricing in some months this year. It is likely that conditions will turn around somewhat once rates are cut" said Conisbee.
There is no doubt that lower interest rates directly impact borrowing capacity, making home loans more attractive.
However, this time around, the situation might not be as straightforward.
While a rate cut would certainly improve borrowing capacity, making it easier for both investors and owner-occupiers to purchase property, the broader economic backdrop might temper the overall price growth.
We are in a period where household debt levels are already at record highs, and wage growth remains sluggish.
People may not rush back into the property market as enthusiastically as they have in the past.
On the other hand, supply-side factors could play a role.
Australia is experiencing a chronic undersupply of housing, exacerbated by increased immigration and population growth.
If rate cuts were to encourage more buyers without a corresponding increase in housing supply, we could see even more upward pressure on prices, particularly in high-demand urban areas.
Different segments, different outcomes
One of the key things to keep in mind is that rate cuts will not affect all buyers or markets in the same way.
Sure, confidence will return as interest rates fall over the next year or two, and we will undoubtedly see a boost in demand as more buyers return to the market.
But not everyone will benefit equally from cheaper borrowing.
Affordability will remain an issue for many potential buyers, especially in areas where wage growth is lagging behind.
After all, buyers can only borrow up to what they can afford to repay, regardless of how low rates go.
This means that the areas likely to see the strongest price growth will be those where residents are seeing faster-than-average wage growth and have higher incomes overall.
I’m talking about the more affluent inner-ring suburbs and the gentrifying middle-ring suburbs of our capital cities – these are the areas where residents are not solely reliant on wages but often have multiple income streams, such as investments or businesses.
On the flip side, the cheaper outer suburbs, where wage growth has stagnated, will still find it difficult to achieve the same level of price appreciation.
Even with lower interest rates, many residents in these areas will struggle to afford a home.
For this reason, when thinking about where to invest, I’d be focusing on locations with strong income growth potential and a diverse economy, rather than areas where affordability constraints may limit future price growth.
Will this fix the affordability crisis?
Another big question is whether lower interest rates will solve Australia’s affordability issues.
Unfortunately, the answer is likely no.
While cheaper borrowing costs might make it easier to enter the market in the short term, the underlying issues—such as housing supply constraints, slow wage growth, and high household debt—remain unresolved.
A rate cut is more of a temporary relief than a long-term solution.
In fact, if prices rise too quickly following a rate cut, affordability would obviously worsen for many Australians.
This would be particularly concerning for those on the edges of the market—first-home buyers and low-income households—who could be further priced out of the areas they want to live in.
What should investors do?
I see the current market offering a window of opportunity for property investors with a long-term focus.
We have what someone would call a "perfect storm" of factors that will lead to strong property markets over the next couple of years:
- Continuing strong population growth
- A shortage of skilled labour
- A massive shortage of housing
- Inflation is coming under control, and will soon be within the Reserve Bank's target range
- Interest rates are set to fall
And when rates do start to fall and buyer and seller confidence returns, the property cycle will move to the next stage.
So as I said, I see this as a window of opportunity for those who are financially in the position to buy their next home or investment property.
Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred in early-2023.
But if the market hands you an opportunity like this, why not take advantage of it?
Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.
Moving forward, demand is going to continue to outstrip supply for some time to come as we experience record levels of immigration at a time when we’re not building anywhere as many properties as we require.
At the same time, the cost of construction of delivering new dwellings will keep increasing not only because of supply chain issues and the lack of sufficient skilled labour but also because builders and developers will only commence new projects if they are financially viable and currently new projects will need to come on line at considerably higher prices than the current market price,
And as consumer sentiment rebounds when it becomes clear that interest rates are falling, pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
We are also going to be experiencing a prolonged period of strong rental growth - the rental crisis will only worsen further, with no end in sight.
Now I'm not suggesting taking advantage of tenants, what I'm suggesting is to recognise there is currently a problem (lack of rental accommodation) and provide a solution.
So rather than trying to hunt down a bargain, focus on buying an "investment-grade property" in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices… Plus they’ll hold their value far better in the long term.
While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.
You need to plan
So while the property markets will create significant wealth for many Australians, statistics show that 50% of those who buy an investment property sell up in the first five years.
And of those who stay in the investment game, 92% never get past their first or second property.
That's because attaining wealth doesn’t just happen, it’s the result of a well executed plan.
Planning is bringing the future into the present so you can do something about it now!
Just to make things clear...buying an investment property is NOT a strategy!
It's important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order
That's because property investment is a process, not an event.
If you’re a beginner looking for a time tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, I suggest you allow the team at Metropole to build you a personalised, customised Strategic Property Plan
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:
- Define your financial goals with clarity.
- Assess whether your goals are realistic within your timeline.
- Track your progress and ensure your property portfolio is working for you, not the other way around.
- Maximise your wealth creation through smart property investments.
- Identify and mitigate risks you may not have considered.
And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
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Your Strategic Property Plan should contain the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
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