Homeowners in Australia are experiencing some relief following a recent cut in interest rates, though there are rising concerns about the potential impacts on home prices. The Reserve Bank of Australia (RBA) has decreased the cash rate by 25 basis points to 3.85%, the lowest level since May 2023. This reduction is projected to save the average mortgage holder over $2,500 per year.
Dr. Nicola Powell, Chief of Research and Economics at Domain, described the rate cut as beneficial for both homeowners and buyers but warned that it could lead to a surge in house prices, particularly in major cities like Sydney and Melbourne. First home buyers may find themselves in a challenging position, as the rate cut improves affordability but also heightens competition in a competitive market.
Although the RBA noted that the earlier February cash rate reduction hasn’t visibly affected prices, which have only seen a 1% annual growth since October, it acknowledged that housing prices can respond swiftly to changes in interest rates. However, the magnitude and speed of these responses depend on various macroeconomic factors.
Economists had anticipated some growth even before the latest rate cut; for instance, AMP’s Deputy Chief Economist Diana Mousina predicted a 3% increase in house prices this year, attributing this forecast to the enabling environment created by lower interest rates. Nonetheless, she mentioned that external factors, such as US tariffs, could hinder buyer confidence.
RBA Governor Michele Bullock addressed concerns regarding rising housing costs, emphasising the importance of prioritising inflation management. She stated that while there may be an increase in housing prices with lower interest rates, the bank’s focus must remain on broader economic indicators like employment and inflation. Bullock indicated that addressing the housing supply-shortage issue falls primarily to government intervention rather than the RBA’s monetary policy.
Treasurer Jim Chalmers welcomed the rate cut, viewing it as beneficial for families with mortgages and indicative of the progress made on inflation within the economy, amidst a global context of uncertainty. Consumer research expert Graham Cooke from Finder also noted the potential for further rate cuts in 2025, suggesting that even if two additional cuts occur, they may not fully alleviate the mortgage stress experienced since rates began to rise in May 2022.
This recent interest rate cut highlights a complex interplay of encouraging mortgage relief while managing growing concerns about escalating housing prices, particularly as competition increases among prospective homebuyers in an already strained market. The need for strategic government action to address housing supply issues has never been more pressing.