Interest rate cuts tipped to ‘accelerate’ home price growth

Expected interest rates cuts this year may bring welcome relief for struggling families but they could also drive double digit growth in home prices.

From cost of living crisis to property boom – experts are forecasting up to a 15 per cent surge in property prices this year as interest rates look ready to drop.

Monthly CPI data from January showed inflation rose less sharply than expected, with economists and property experts noting that a move by the Reserve Bank of Australia to cut rates was firmly on the horizon.

ABS data showed the CPI rose 3.4 per cent in the 12 months to January 2024, equalling the previous month’s data but down from the November 2023 figure of 4.3 per cent.

Real Estate Institute of Australia president Leanne Pilkington said the downward trend of inflation was “undeniable”.

“The pointers are that the RBA should keep the lid on further rate rises at its meeting in three weeks’ time and that home buyers can anticipate a rate reduction later this year,” Ms Pilkington said.

Buyers and homeowners are looking forward to some interest rate relief. Picture: Lyndon Mechielsen/The Australian

While a drop in interest rates is expected to bring welcome relief to families struggling with mortgage stress, it is also expected to add pressure to the property market, driving sales prices up even higher than the strong levels recorded last year.

With the market already pricing in two interest rate cuts this year – the first in June and the second at the end of the year – it’s likely 2024 will see double digit growth in house prices, said Ray White’s chief economist Nerida Conisbee.

“It depends on how much interest rates are cut, but potentially we could see up to a 15 per cent increase (in property prices) throughout the year,” Ms Conisbee said.

Cost of living pressures are expected to drop as inflation falls. Picture: Brendan Beckett

She said 2023 had performed well above some economists’ expectations due to a chronic shortage of supply, with property values up almost 10 per cent across the country during the year.

“We needed around 250,000 homes last year; we built 175,000,” she said. “Trying to get them built was problematic, construction costs were high, there were a whole lot of factors that led to pricing – and those factors are still in play.

“We were already in a boom last year – and this (falling interest rates) will just accelerate it.”

Ray White’s chief economist Nerida Conisbee.

Head of National Acquisitions at Rethink Investing Robert Martin said if interest rates were cut “too soon” – during the first half of the year – it would bring more buyers back into the market and push up prices.

“In certain areas you could certainly see 10 to 15 per cent growth,” he said. “There’s not enough building happening.

“A lot of people are still desperate to get into the property market.”

Brisbane and Perth are expected to see values rise by about 10 per cent following rate cuts, while the more expensive markets of Sydney and Melbourne could rise closer in line with CPI, he said.

Auction turnouts are strong thanks to low supply. Picture: Max Mason-Hubers

Mr Martin said the most likely scenario would see rates dropped for the first time in October or November this year.

Canstar Group executive of Financial Services Steve Mickenbecker said the RBA would be reluctant to cut rates before seeing quarterly inflation results.

“The March quarterly release will come too early to signal a rate cut but the June quarterly release in late July could very much raise borrowers’ hopes,” he said.

Ms Conisbee said economists and borrowers would be watching the RBA’s moves carefully.

“The Reserve Bank governor has said that she may move more quickly on rate cuts even if we don’t get below that 3 per cent band,” she said.

Rate cuts have historically been correlated with rises in home prices, while rate increases have usually put a lid on price rises. Last year was a rare exception to that pattern, with property prices rising considerably in many areas, despite numerous interest rate hikes throughout the year.