CommBank predicts FOMO will leave house prices up at end of year despite rate cuts

Australia’s biggest bank says there may be some brief relief for those priced out of owning a home, but there could be a brutal side effect to cutting rates.

Australia’s biggest bank is betting house prices will fall in early 2025, but rise again later in the year and finish 4 per cent higher than 2024 prices overall.

Commonwealth Bank head of Australian economics, Gareth Aird, says house prices will fall in the coming months despite a highly-anticipated interest rate cut.

“Momentum has cooled when looking at the pace of home price growth over the past year. In turn, rental growth is also moderating in most parts of the country,” Mr Aird said.

“It is not unusual to see some fatigue creep into the national housing market given affordability remains stretched on most conventional metrics.”

Australian house prices are being tipped to fall - temporarily - once the central bank starts cutting interest rates. Picture: NewsWire / Nadir Kinani

“The housing market is a momentum market. And if buyer appetite responds quickly to an interest rate cut it is possible that fear of missing out once again becomes a key theme in the market.”

The number of houses for sale in Melbourne and Sydney has been increasing on the back of almost three years of high interest rates and cost-of-living pressures; the tax regime in Victoria has also made investment properties less attractive. Prices in Melbourne are coming down, and Sydney’s price growth is slowing.

Australia’s financial sector is predicting no more than four rate cuts this year, as a reaction to the RBA deliberately not raising the cash rate high - by relative, global standards.

Commonwealth Bank says the latest quarterly inflation data gives the Reserve Bank a green light to start cutting the cash rate. Picture: NewsWire / Gaye Gerard

But because the RBA left the door open for rate hikes throughout 2024, would-be home buyers were apprehensive, Mr Aird said.

“That said, the correction in the Sydney and Melbourne markets is modest. And there is still a good amount of buyer appetite in most parts of the country.”

In January, Australian capital city house prices edged lower for a fourth consecutive month. Regionally, prices ticked up in January.

Commonwealth Bank predicts recent quarterly inflation data gives the RBA a green light to begin cutting the cash rate this month.

The bond market predicts the RBA will lower the cash rate from 4.35 per cent to 3.45 per cent by the end of the year. Markets forecast the cash rate will settle at 3.3 per cent in mid-2026.

Gareth Aird says there could be a “fear of missing out” factor once rates are cut. Picture: Supplied

“We don’t expect property prices in Sydney and Melbourne to suddenly shift higher as rates are cut given there is a lot more advertised stock on the market compared to a year ago - advertised stock levels sit well above the five‑year average for this time of the year in Sydney and Melbourne - but it is a risk,” Mr Aird said.

“The housing market is a momentum market. And if buyer appetite responds quickly to an interest rate cut it is possible that fear of missing out once again becomes a key theme in the market. On that score, auction clearance rates will be the best near term guide as to any shift in buyer appetite.

“Our base case looks for national home prices to end 2025 up (approximately) 4 per cent. But prices are likely to continue to edge lower in H1 25, before lifting over the second half of the year as borrowing capacity increases due to lower mortgage rates.”