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House prices predicted to soar after RBA’s historic cut

Jessica Yun
·5-min read
(Source: Getty)
(Source: Getty)

The Reserve Bank’s cash rate cut to 0.1 per cent will have ripple effects for Australia’s property prices, as well as mortgages and personal savings, all which move according to the national interest rate.

Historically, when interest rates have been slashed, house prices tend to push upwards.

This is because a lower interest rate also causes home loan rates to drop. This could be the push needed to encourage home buyers, who may have been on the fence about getting and financing a mortgage, to enter the housing market.

Interest rates are already at the lowest they’ve ever been – in fact, the RBA keeps breaking its own record every time it slashes the interest rate again.

Interest rates aren’t expected to rise for a long while, with Deloitte Access Economics partner Chris Richardson stating rates will be “nailed to the floor for years”. AMP Capital chief economist Shane Oliver believes rates will be on hold for “at least” another three years. This outlook helps people to feel confident in their home loan serviceability.

We’re already seeing evidence of this confidence after fresh ABS data revealed the value of home loan approvals rose by 5.9 per cent in September. And that’s off the back of a 12.6 per cent surge in August, and a 8.9 per cent July hike the month before that.

All of these factors contribute to Australians’ willingness to enter the property market. Covid-19 triggered a five-month slide in the housing market, but this downturn is officially over after CoreLogic’s latest data revealed dwelling values rose by 0.4 per cent in October.

It’s why property experts are expecting house prices to be given a further boost by the latest rate cut.

“Property prices in all cities and areas are positively impacted by lower mortgage rates,” Commonwealth Bank’s head of Australian economics Gareth Aird told Yahoo Finance.

“The flow of new lending historically has a strong leading relationship with property prices, so an interest rate cut will add support to home prices.”

Not only are mortgage rates already at record lows, but new lenders are entering the home loan market creating greater competition, said realeastate.com.au chief economist Nerida Conisbee.

“Access to funding is getting easier and cheaper,” she said.

“For Australian property, lower costs of borrowing will likely accelerate the trends we are already seeing; very strong growth for premium property, family homes and regional areas, particularly Northern NSW,” Conisbee added.

A 1 per cent cut to the cash rate is estimated to lead to an 8 per cent rise in house prices, according to CoreLogic head of Australian research Eliza Owens.

House prices have already risen amid the low interest rate environment: CoreLogic’s latest data revealed Adelaide and Darwin’s 1.2 per cent price growth led the charge in the nation’s property market upswing, with Melbourne (-0.2 per cent) the only city to post a decline.

Far from crashing, the property market has actually been fairly well insulated from the pandemic. “Property values have actually increased since the onset of the pandemic across these regions [of Adelaide, Brisbane and Canberra],” Owens added.

And despite the long lockdown, Melbourne’s property market is also expected to come back to life.

“Already CoreLogic are observing a steep slowdown in the rate of decline across Melbourne values, a rise in vendors keen to sell, and a vast improvement in weekly auction figures. This points to a further cash rate reduction helping to stabilise values across Melbourne in the coming months.”

Rate cut ‘unlikely to set off a new boom’

Though the cut is a “positive” for property markets and house prices are expected to rise, AMP Capital chief economist Shane Oliver said the drop from 0.25 per cent to 0.1 per cent was not substantial.

“It’s only a small cut; the hit to immigration will act as a big drag on demand for housing, and we are yet to see the impact from the ending of various income support measures and the ending of the bank payment holiday.

“So it’s unlikely to set off a new boom.”

Metropole Property Strategists CEO Michael Yardney said the rate cut itself won’t have a major impact.

“More important will be the message that low rates will be locked in for longer giving certainty to borrowers that they won’t be hit with an interest rate rise any time soon,” he said.

On top of this, home buyers will be granted extra flows of credit; the responsible lending rules have been relaxed; and Federal and State Governments have committed to key infrastructure projects or home-building schemes.

Yardney predicts capital city prices will be higher by the end of 2020 than they are now.

“I’m prepared to ring the bell and announce that, overall, our property markets are now moving up from their low points of this property cycle.”

Meanwhile, hotspotting.com.au managing director Terry Ryder doesn’t believe the cut will shift the dial on property prices at all.

“I think interest rates are hugely overrated as a driver of movements in property markets,” he told Yahoo Finance.

“Economists tend to see them as the prime influence on property markets, [but] they are not. We've had record low interest rates for years and another small shift downwards won't change the scenario for most consumers.

“We already have very busy markets in most locations across Australia – an official rate cut won't hurt but it won't cause any sudden uplift in market activity.”

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