What the interest rate cut will mean for the property market

The Reserve Bank’s interest rate cut is likely to improve sentiment in the property market and could start to put a floor under falling prices, experts said.

A couple without children, earning average incomes, could borrow an extra $23,100 after the RBA cut the cash rate to 4.1 per cent at its meeting on Tuesday but took a cautious tone on further cuts. This takes their maximum capacity to $1,052,800.

Home buyers will be able to borrow more.Credit: Joe Armao

CoreLogic head of research Tim Lawless thought the biggest impact of the cut and the RBA’s cautious tone would be a lift in market sentiment, rather than a significant improvement in how much buyers could borrow.

“I think this is a net positive for housing. It means borrowing capacity is improving a little bit and sentiment should be rising,” he said.

“We probably will see a subtle lift in buyer activity but it might be enough to keep a floor under housing price falls rather than be the catalyst for a material housing price upswing.”

He thought some of the areas where prices have fallen more over past couple of years were more likely to pick up after a rate cut, such as more expensive parts of Melbourne, including the Mornington Peninsula and Stonnington in the inner east where values have fallen.

CoreLogic recently modelled the neighbourhoods likely to bounce back in a scenario of four rate cuts through the cycle – affluent and investor-heavy areas topped by Leichhardt in Sydney and the Whitehorse area in Melbourne. RBA governor Michele Bullock on Tuesday cautioned there was no guarantee that rates would fall as fast as some forecasters expect.

Lawless thought these areas would still be likely to rebound, although not as far if rates did not come down as much as modelled.

Domain chief of research and economics Dr Nicola Powell said Australians had been waiting for this rate cut and it would offer certainty.

“It’s going to boost buyer sentiment. That doesn’t necessarily mean it’s going to have a flow-on effect to price,” she said.

“One rate reduction will obviously boost borrowing capacity but it’s not going to light a floor under demand.”

She noted there was still a large volume of homes for sale, for example, and there was a gap between house prices and the capacity of buyers to pay.

But she thought higher borrowing capacity might bring back some buyers who have been sitting on the fence.

She thought the change would have a larger impact in the more expensive cities of Sydney and Melbourne than elsewhere in Australia, wondering if Sydney could now have a relatively short downturn.

“We’re not going to go into a boom time scenario, absolutely no, but it might create a softer landing,” she said.

She also thought the rate cut would benefit first home buyers, although the risk was that it could bring investors back into the market, too, and compete with them.

SQM Research managing director Louis Christopher was more upbeat and thought that if the next inflation figures were benign, there could be another rate cut by May.

He had been expecting modest housing price falls of between 1 and 5 per cent in Sydney and Melbourne this year, but now he expects both cities to rise. Melbourne prices could go up between 2 and 6 per cent this year, and Sydney between 3 and 7 per cent, he said.

“There is an increase in borrowing power, but so far it’s not a huge increase, but nevertheless it is an increase. I think it’s more sentiment driven,” he said. “Even with this rate cut, sentiment is going to change.

“That starts bringing out the fear of missing out a bit.”

He expects robust population growth and he said a tight rental market would spur first home buyers.

“The rental crisis, after looking like it was starting to ease a bit in the second half of 2024, hasn’t eased. It’s very much still with us. And that is a result of ongoing underbuilding combined with rapid population growth,” he said.

“As a renter in that rental market if you had any opportunity to buy your first home, given the rate cut, would you look at it? Of course you would.”