One thing that won’t change following RBA shock decision

Australia’s house prices have been on the rise since the RBA began its rate cutting cycle, but don’t expect a repeat of the post Covid run, experts reveal.

Australia’s housing market is unlikely to experience another price boom in line with the Covid pandemic as interest rates play less of a role as they did in the recent past.

In a shock to the market, the Reserve Bank of Australia held the official cash rate at 3.85 per cent on Tuesday, opting against back-to-back rate relief.

REA senior economist Anne Flaherty said Tuesday’s hold could depress price growth in real estate moving forward.

“Today’s decision to hold may slow the pace of price growth seen in the months following the February and May cuts,” she said.

“Nationally, prices are up 3.2 per cent since the start of the year, adding around $26,000 to the median price of a home.

“For many, affordability constraints continue to weigh heavily, as many households grapple with stretched budgets.”

RBA rate cutting cycle unlikely to see house prices boom. Picture: NewsWire / Andrew Henshaw

AMP chief economist Shane Oliver said it was unlikely interest rates cuts would have seen a surge in house prices with “even worse affordability constraints” stopping a post Covid surge.

“It will be more constrained this time around. When we came out of Covid, interest rates went to zero and you could get fixed rates around two per cent and variable rates around three per cent,” he said.

“I don’t think we are going to see it this time around

“Affordability was arguably better in 2020 because house prices initially fell a bit.

“So there was super duper low interest rates and prices coming off a dip which is why there was a supercharged rebound in prices.

“This time around we are seeing the normal relationship outside of recessions with lower rates just meaning higher prices and unfortunately worsen the affordability problem.”

The RBA cut the official cash rate after its May meeting and is expected to do so again on Tuesday following the July meeting. Picture: NewsWire / Nikki Short

The Reserve Bank of Australia has cut interest rates twice since inflation was contained – in February and May.

After a short-lived price reprieve in late 2024, home prices are at peak levels across the country, with Melbourne and Hobart being the exception.

Dr Oliver said every 0.25 per cent cut in rates by the central bank adds around $9000 that the average Aussie can borrow.

This would theoretically add $18,000 tofirst-home buyers’ borrowing capacity.

“It’s a rough guide but it depends on whether people borrow the full amount and how many buyers there are to sellers,” he said.

“But if every borrower has an extra nine grand following every rate cut then it could mean house prices go up by the same amount, it could mean house prices go up by the same amount and is why over time the benefit to home buyers of lower interest rates tends to be lost to higher house prices.”

Dr Oliver said rate cuts would likely make things worse for first home buyers if the RBA continues to cut interest rates.

“If we had a more normal property market and the supply of new homes was in line with the growth of the population then lower interest rates at times could help first home time buyers,” he said.

“But in the current environment, when there is an imbalance between demand and supply, it just makes the situation worse.”

Originally published as One thing that won’t change following RBA shock decision