RBA interest rate cut could send house prices up spelling bad news for first home buyers

While homeowners have hailed Tuesday’s interest rate cut it could send prices up for first home buyers.

First home buyers have been warned that the good news on interest rates could turn out to be a double-edged sword when it comes to house prices.

After the Reserve Bank of Australia (RBA) officially announced an interest rate cut from 4.35 per cent to 4.1 per cent on Tuesday, experts are warning that the big move is set to shake up the Australian property market.

Homeowners have been slugged a whopping $54,000 in extra repayments on their mortgages in Sydney as a result of interest rate rises since the election of the Albanese Government.

But while existing owners can only expect relief of around $115 a month, the big impact for buyers is that it will increase the amount first home buyers and downsizers can borrow.

Double-edged sword looms for first home buyers

Buyer’s agent Lloyd Edge, the author of Positively Geared, said the rate cut could have far-reaching consequences for property prices, borrowing power, and affordability.

“Interest rate cuts typically increase borrowing capacity, bringing more buyers into the market and fuelling price growth,” he said.

Federal Treasurer Jim Chalmers. Picture: NewsWire / Martin Ollman

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“We’ve seen this play out time and time again, but this cycle is different—rising living costs and supply constraints could make for a more complex landscape.”

“Lower interest rates don’t just mean cheaper repayments—they also encourage more buyers to enter the market at once, creating competition and putting upward pressure on prices. Savvy buyers will plan to avoid getting caught in a bidding frenzy,’’ Mr Edge writes in his new book

How much more you can borrow

A new Canstar analysis shows that a single person earning the average full-time wage of $100,292 currently has a borrowing capacity of $534,200.

But that same person could potentially borrow an additional $12,000 more from the bank with the cash rate cut to 4.10 per cent, if this cut is passed on to new customer variable rates.

This is based on a single person taking out an owner-occupier loan with no other debts, no dependents and minimal expenses.

The number of children or dependents you have will reduce the amount that a bank is prepared to lend to you based on your capacity to service the loan.

For a family, based on a couple with two average wages looking to borrow, their loan limit is currently up to $1,029,700.

But that will increase by up to $23,000 after Tuesday’s news.

For a family earning the equivalent of 1.5 wages – that is a breadwinner working full-time and another working part-time their borrowing limit is currently estimated at $666,800.

That’s now set to jump by $14,900.

What it means for first home buyers

For those struggling with affordability, the rate cut is a double-edged sword.

“While repayments may be lower, increased demand could make it harder to secure a property at a reasonable price,’’ Mr Edge said.

“First home buyers should focus on getting pre-approved and securing a property before prices climb too fast. The best strategy is to look beyond traditional hotspots and find suburbs poised for growth before they become too competitive.”

House price forecast. Source: ANZ

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Historically, interest rate cuts have been followed by property booms, particularly in Sydney and Melbourne.

“Not all cities will see equal growth. While Sydney and Melbourne tend to rise first, emerging markets like Brisbane, Adelaide, and Perth could offer better value for buyers who act early,’’ Mr Edge added.

Suburbs where home prices could rise

Homeowners planning to sell could be set to make a killing as the RBA begins its rate-cutting cycle with predictions some suburbs could record an eye-watering 19 per cent jump in house values based on a one per cent reduction in interest rates.

CoreLogic has predicted the housing market is set to secure a boost as interest rates start falling.

That’s good news for homeowners planning to sell in the next two years but potentially a reason for buyers to take the plunge now, before prices start rising.

Based on previous periods of rate reductions, national dwelling values would increase an average of 6.1 per cent for each one percentage point decline in the cash rate, according to CoreLogic.

First home buyers have been warned that the good news on interest rates could turn out to be a double-edged sword when it comes to house prices. Picture: Lisa Maree Williams/Getty Images

But as CoreLogic’s Head of Research Eliza Owen points out, certain markets will see a bigger boost from rate reductions than other suburbs.

“A reduction in the cash rate could spur a recovery trend in the high end of the Sydney and Melbourne housing market, which tend to be the bellwether for broader market recoveries in those cities,” she said.

“Lower interest rates are set to boost the housing market in 2025. Lower rates mean buyers can borrow more, spend more, and ultimately make housing a more attractive investment.

“In the current economic climate, these rate cuts should go a long way in boosting consumer confidence, signalling an end to the recent battle against inflation.”

For example, in Leichhardt Sydney where the median value is $2.329 million, house prices have fallen 6.9 per cent from the market peak to January 2025.

But modelled on a change from a one percentage point drop in rates the price could be set to soar by 19.1 per cent or over $460,000.

In Warringah, the old stomping ground of Tony Abbott, the median value is currently $2.4 million, which is a nine per cent decline compared to the previous market peak.

However, prices could rise by 18 per cent if there is a one percentage point drop in interest rates over the next year or so, according to CoreLogic.

Double-digit gains are predicted for Sutherland-Menai-Heathcote, Hurstville, Hornsby, Parramatta, Sydney inner city, Botany and Canterbury.

In Sydney, Melbourne, Hobart and Canberra, CoreLogic suggests many of the markets with a solid response to rate reductions are also seeing values well below their peak under recent interest rate rises, so easier access to credit may trigger a recovery trend in these markets.

In Melbourne, there are predictions of 18 per cent increases in prices in Whitehorse-West, Essendon and Manningham-West where the median value is $1.4 million.

Originally published as RBA interest rate cut could send house prices up spelling bad news for first home buyers