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The potential of interest rate cuts in 2025 create optimism amongst property investors, but what does it really mean for the market?
It’s now looking more and more likely that interest rates are entering a new phase as we get inflation under control and the RBA’s monetary tightening cycle nears its end. As of mid-November 2024, the market is anticipating multiple interest rate cuts early and mid to late next year, creating optimism amongst property investors, but what does it really mean for the market?
It’s very likely that rates will drop, and not once but multiple times and, the market current pricing of future contracts is estimating a near 100% chance that there will be a full rate cut in June to 4.10%, then again, a further cut by February 2026 to 3.85%.
The market predicts there will be continued inflationary easing, and we’ll see interest rates trend lower.
Interest rates inversely correlate with property prices, which means a higher interest rate have a seen a period of dampening effect on prices as capital becomes more expensive, and the opposite is true with a lowering of rate typically leads to a period of increasing prices due to cheaper capital meaning buyers can borrow more.
The KPMG Residential Property Outlook report from June stated that "Interest rates will be the main influencing factor to house prices in 2025. We expect the RBA to cut rates mid to late 2025, which is anticipated to have a positive impact on house prices via the availability of credit and buyer’s confidence".
DPN’s research executive, Alex Reithmeier believes “Falling interest rates causing capital to be cheaper will increase affordability to buyers, meaning it’s anticipated that property prices should increase to new all-time highs across Australian markets in 2025.”
We anticipate that this upward price pressure will be supported further by limited supply coming onto the market as recent ABS data showed dwelling approvals for the 2024 FY only achieved two thirds of the housing accord target with 160,000 approvals versus the target of 240,000, putting us further behind the eight ball.
Interest rates will be the main influencing factor to house prices in 2025
It’s likely then that housing affordability will continue to be a front-and-centre in the media and political cycles.
“For investors, lower rates improve their cash flow, meaning that properties move from neutral or negative geared to positive, as cash flow improves when rates drop. Said David Khalil, DPN Director.
Heading into a likely period of multiple years at rates in the low 3% range requires strategic planning and, in sporting idiom terms, we are anticipating where the puck will go, not where it’s been.
Some potential second order effects of prolonged lower interest rates can be:
Additionally, third order effects could include regulatory intervention such as policy changes to cool market down such as tightening lending standards, as was seen in by APRA tightening the debt-to-income ratio in 2021 as it tried to get in front of a surging housing boom.
We also highlight that while rate cuts may drive demand and increase property prices, it should be noted other factors such as inflation, wage growth and global economic conditions will continue to play a crucial role, and it’s important to stay informed and adapt strategies based on economic conditions.
References: ASX.com.au, RBA.gov.au, KPMG residential market outlook, Treasury.gov.au, savings.com.au
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