Rate cuts and election promises to push house prices up even higher

Australian housing will become less affordable over the next two years despite government projects to build more homes, with predictions that prices will outpace inflation and wages growth in every capital city.

HSBC is tipping prices in Sydney and Melbourne to rise by up to 12 per cent by the end of 2026 as strong demand, a lack of new housing and cuts in official interest rates by the Reserve Bank encourage more people into the market.

House prices in Sydney and Melbourne could climb 12 per cent by the end of next year, HSBC has warned.Credit: Simon Schluter

The Reserve cut the official cash rate by a quarter percentage point this week, taking it to a two-year low of 3.85 per cent. All major banks have promised to pass on the cut, the second this year, in full to their customers starting from next Friday.

While welcomed by borrowers who have paid almost $300 billion in mortgage interest since the bank started lifting interest rates in early 2022, the cut has also prompted concerns it could inflate an already expensive property market.

After the Reserve Bank cut official interest rates on Tuesday, governor Michele Bullock noted there was little the RBA could do about housing affordability, which had been a long-term issue.

“This didn’t just pop up overnight. This has been brewing for many years, so there’s nothing that the bank can do about this,” she said.

HSBC is expecting Sydney and Melbourne house prices to climb by between 1 and 4 per cent this year. It had previously forecast between minus 5 per cent and 1 per cent growth for both cities.

In 2026, prices in Sydney are tipped to climb by between 4 and 8 per cent (the previous forecast had been 1-7 per cent), while Melbourne prices are expected to rise by between 3 and 7 per cent.

Brisbane and Perth are expected to be the strongest markets this year and next. Brisbane prices are forecast to lift by between 1 and 7 per cent this year and by between 6 and 10 per cent in 2026.

Perth prices are predicted to follow growth of between 6 and 9 per cent this year, with similar growth next year.

HSBC chief economist for Australia and New Zealand, Paul Bloxham, said three key factors were likely to underpin higher house prices: predicted rate cuts, federal policies promised at the recent election and state and council planning laws.

He noted the Reserve Bank’s rate cut, with the chance of more rate reductions in coming months, would reduce prospective mortgage repayments while there was an ongoing shortage of supply relative to demand.

Bloxham said some federal government policies, particularly its plan to effectively reduce to 5 per cent the deposit needed by first-time buyers, would put upward pressure on prices.

“Many of these policies, including first home buyer grants, which have gradually increased over a run of years, have primarily increased housing demand and housing prices, increasing the affordability challenge,” he said.

“A greater focus on improving housing supply is needed.”

New suburbs on the outskirts of capital cities, such as Oran Park in Sydney, are needed to deal with housing affordability.Credit: Nick Moir

The government is hoping to have 1.2 million homes built by mid-2029, although the National Housing Supply and Affordability Council this week said at current build rates the country would fall 262,000 buildings short of the target.

Bloxham said outside the federal government policies, including such programs as build-to-rent, there were structural issues including state zoning regulations, local council planning rules and NIMBYism that were holding back construction.

The lift to the property market caused by the RBA’s rate cut may also flow on to the business sector, especially if there are further reductions in the cash rate. Financial markets put the chance of a rate cut at the bank’s July meeting at 79 per cent and fully expect a cut by August.

MYOB’s latest six-monthly business monitor, which surveys 1000 small- to medium-sized firms, showed 16 per cent of businesses had noticed some benefit from the quarter percentage point cut in February.

Twenty-one per cent of those surveyed said a cut of between 0.75 and 1 per cent, which is what financial markets are expecting will be delivered by early next year, is needed to boost operations.

MYOB chief executive officer Paul Robson said while lower interest rates would help, many businesses felt the pain from the Reserve’s previous rate hikes.

He said 55 per cent of businesses reported elevated interest rates had placed a strain on their operations, with 22 per cent describing the pressure as significant or extreme.

“While the RBA rate change is encouraging news for SMEs navigating what has been a challenging economic landscape, the next few months will be watched closely by small and mid-sized businesses as they await more rate relief and for the latest cut to have a flow-on effect on consumer spending,” he said.

“If rates reduce in line with predictions, the outlook for SMEs will be a positive one in 2025.”

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