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Interest rate cuts set to fuel real estate demand and values

February 12, 2024

The real estate market is experiencing a positive shift as inflation diminishes, leading to a surge in buyer activity during open house inspections. Additionally, influential state politicians nationwide are actively advocating for the Reserve Bank to consider a significant reduction in interest rates as early as possible.

At least the central bank came part of the way to the party by keeping interest rates unchanged at 4.35% in its most recent meeting, responding to the drop in inflation to 4.1% in the December quarter. Furthermore, many analysts predict that interest rate reductions could begin in the middle of the year, providing support for the upward trajectory of real estate values in 2024.

The optimistic outlook is further reinforced by historical data from a Reserve Bank report a few years ago, suggesting that a sustained percentage point drop in interest rates could in some circumstances result in a long-term boost of 17% in housing prices.

Angus Raine, Executive Chairman, Raine & Horne said, “This positive sentiment around interest rates is reflected in the increasing number of owners seeking appraisals for the value of their properties and on the demand side a notable rise in attendances at open for inspections (OFIs) compared to the same period last year.”

Raine & Horne's data reveals an 11% surge in property owners seeking appraisals and a robust 21% increase in OFI attendance compared to the previous year. Concurrently, property listings have decreased by almost 9%, indicating a shift towards property owners contemplating a sale.

Financial institutions are already adjusting to the anticipation of rate cuts by proactively reducing fixed interest rates on home loans. According to comparison website Mozo, lenders such as Macquarie, AMP Bank, Bendigo and Adelaide Bank, and the Bank of Queensland have implemented cuts ranging from 0.1 to 0.76 percentage points on fixed rates. Moreover Macquarie slashed its variable interest rates on its Basic Home Loan by up to 21 basis points in late January.

Politically, leaders such as Queensland's Premier Steven Miles, Victoria's Jacinta Allan, and Western Australia's Roger Cook have joined the call for immediate relief for mortgage holders, aligning with the public sentiment for rate cuts.

Moreover, Australia currently grapples with a significant shortage of housing, evidenced by a 2.1% decline in home starts during the 2023-24 period, amounting to approximately 170,100. To keep pace with population growth, it is imperative that new builds align with the annual requirement of 200,000 homes.

“This scarcity has been a driving force underpinning the values of housing and rental properties,” Angus said.

He added, "Considering the convergence of factors, such as the supply constraints, and the way real estate markets historically respond to interest rate cuts, Australian real estate is in for a very strong year.

According to Angus, “The bricks and mortar market is poised to at least match the 8% annual growth recorded in 2023 and there is potential for even stronger returns in 2024.”