What falling interest rates will mean for the property market

A round of Reserve Bank rate cuts is tipped to push property prices higher by as much as double digits, but will offer modest relief to home owners who borrowed at rock-bottom rates.

Many economists expect the RBA will cut the official cash rate by 0.25 percentage points from its decade high of 4.35 per cent on Tuesday, and if not then, later this year.

Rate cuts could boost buyer sentiment and activity, but won’t make it much easier to afford a home. Credit: Steven Siewert

High interest rates have slashed borrowing capacities and affordability and put pressure on mortgage holders as repayments shot up.

House prices fell less than expected in response to the hikes, and even rose in some places despite the added pressure on owners and buyers.

What would a rate cut mean for mortgage repayments?

Modelling from comparison platform Canstar showed a single rate cut of 25 basis points would cut the monthly repayments on a $500,000 mortgage by $77 and by $154 on a $1 million mortgage.

Canstar data insights director Sally Tindall said the extra cash would be welcomed by mortgage holders, but would not make their repayments much more affordable.

“There’s no doubt it will provide some much-needed relief from the 13 RBA hikes … but it pales in comparison to how much money their repayments have increased by over the past three years,” she said.

What would a rate cut mean for borrowing capacities?

Canstar modelling showed a single person earning the national average salary of about $100,000 would receive a boost of $12,000 to their maximum borrowing capacity, which would grow it from $534,200 to $546,200.

A couple where both earned the average wage would get a bump of $23,100, which would increase their maximum loan amount from $1,029,700 to $1,052,800.

Tindall said the modest increase would not make it much easier for prospective buyers.

“It’s not a huge boost to your borrowing capacity,” she said. “I don’t think it will fix the affordability crisis that’s plaguing capital cities … and regional areas.”

What would a rate cut mean for house prices?

Property research house CoreLogic modelled that 1 percentage point of rate cuts could lead to a 6.1 per cent increase in dwelling values across Australia, but would have an increased effect on cities where house prices fell more since rates were first increased in 2022.

The modelling showed the median dwelling value could rise 11.4 per cent in Sydney and 9.2 per cent in Melbourne, where prices have been weak. Brisbane’s median dwelling value could grow 1.9 per cent, and Perth’s could fall 0.4 per cent.

“Against a 1 per cent cash rate reduction, it is more modest than you might expect, but it comes in part from the diversity of the market as well,” CoreLogic head of Australian research Eliza Owen said.

Owen said the figures were inexact, and should be interpreted as sensitivity to the cash rate.

“It’s almost like what must go down comes up and vice versa. Given the fact that Sydney and Melbourne are more responsive to interest rate rises, it makes more sense they would be more responsive to a cut in the cash rate as well,” she said.

AMP chief economist Dr Shane Oliver said he did not expect house prices to rise sharply in response to cash rate cuts, but did expect prices to grow more in weak markets like Sydney and Melbourne.

“The problem is house prices never fell much in response to the decline in the capacity to pay,” he said. “We had rate hikes in 2022 that led to massive 30 per cent declines in the amount people can borrow to buy a home, but house prices never fell 30 per cent.”

What would a rate cut mean for auction clearance rates and market sentiment?

Oliver said it was likely auction clearance rates in Sydney and Melbourne could rise in response to a rate cut; recent results were already up on late last year.

“I think buyers are coming out of the woodwork again in response to all of the rate-cutting talk,” he said. “There’s been a significant change of sentiment which has seen more buyers show up at the auctions. On my count we were averaging about 69 per cent in Sydney for [so far in] February, and in December we were at [about] 52 per cent.

“Melbourne was [about] 58 per cent in December … Now we’re averaging about 64 per cent.”

Oliver expected clearance rates would go up soon after a rate cut, but it was unclear if they would hold up if more vendors rushed to list their homes in response.

“I think they’ll get a bit more of a bounce. Sydney will push more sustainably into the 70s and Melbourne will push into the 60s, early 70s,” he said.