Four interest rate cuts in Australia could spark housing price boom

ASX’s RBA Target Rate Tracker, published at the end of each trading day, yesterday revealed Australian financial markets have begun pricing in four interest rate cuts within the next 12 months.

The RBA is expected to first cut interest rates by 25 basis points in February, with three more by August, according to the market expectations. It’s the first prediction of multiple cuts since the Reserve Bank started hiking rates in May 2022.

The cuts have been predicated on forecast drops in US interest rates, which would raise the value of the Aussie dollar relative to the Greenback and put the RBA in a better position to drop the cash rate.

Four interest rate cuts would bring much needed relief to existing homeowners and prevent many families from needing to sell their properties.

But first-home buyers have been warned that the cuts could do as much harm as good by increasing competition for housing and pushing prices up.

SQM Research director Louis Christopher said four cuts next year, while still a more remote possibility, would cause a huge rebound in property markets that had recently been weaker. This included Melbourne and Sydney.

“There is a strong history of rate cuts stimulating housing demand,” he said, noting that new cuts would unleash a lot of pent up demand from buyers.

Many of these buyers had been sitting on the sidelines in recent years waiting for a change in rates, Mr Chistopher said.

Four cash rate cuts next year would mean the Reserve Bank board making a decision to cut rates at four out of the eight meetings it’s scheduled to have next year.

The RBA’s Official Cash Rate currently sits at 4.35 per cent. The current owner-occupier variable discounted rate sits at 7.07 per cent.

Adelaide, South Australia. Source: Getty

The RBA Target Rate Tracker calculates the probability of changes in the Overnight Cash Rate based upon the implied yields of very short term (30-day) interest rate futures.

upon the implied yields of very short term (30-day) interest rate futures.

It comes as several lenders cut fixed and variable home loan rates for both owner occupiers and investors in early September.

Experts said cuts to fixed rates were often an indication that banks expected variable rates to be lower in the coming months.

Mozo money and finance expert Rachel Wastell said these cuts were likely to continue into September.

“(They) are a reflection of the growing industry confidence that the RBA’s next move is a cut,” she said.

Analysis from comparison group Finder showed that four rate cuts would save the average Aussie homeowners $5,076 per year on mortgage repayments.

Finder head of consumer research Graham Cooke advised hopeful homeowners to bear in mind that the expectations of markets were only a prediction.

“The ASX is clear on its site that the information is indicative only, meaning that while the market may be pricing in the possibility of four rate cuts, this is not a guarantee that the Reserve Bank will take action,” he said.

“The ASX Target Rate Tracker reflects market sentiment based on short-term interest rate futures, but economic conditions can shift quickly. Homeowners and investors should remain cautious.”

My Housing Market economist Andrew Wilson said homeowners should take the ASX predictions with a grain of salt.

“It comes from a speculatory environment. A lot can change between now and next year,” he said.

Canberra, Australian Capital Territory. Source: Getty

Mr Christopher said the ASX expectations hinged greatly on what happened in the US. “It’s a big ‘if’. We don’t believe (four cuts) would happen, but if it did there would be a definite rebound. A lot would depend on migration,” he said.

Mr Cooke said four interest rate cuts would change the housing market.

“Many households have been feeling the squeeze following 13 rate hikes – a series of rate cuts would save Aussies hundreds of dollars per month on variable-rate home loans,” he said.

“(But) it’s important to remember that these predictions are based on probability, and the future is still uncertain.”

Mr Cooke added that rate cuts came with a potential downside for those seeking a new home.

“While rate cuts might alleviate some financial pressure on current homeowners, they could also reignite demand in the housing market, potentially driving up property prices again,” Mr Cooke said.

Home seekers may get a boost to their borrowing power from rate cuts, but the benefits could be negated by higher prices.

“This would make it harder for first-home buyers to enter the market, even with lower borrowing costs.”

Those on soon-to-expire fixed rates would be among the big winners of a succession of rate cuts, Mr Cooke explained.

“Homeowners on fixed-rate mortgages might not immediately feel the benefits of the cuts. However, those whose fixed terms are ending soon could see better refinancing options when their loans revert to variable.”