The Reserve Bank of Australia’s (RBA) decision to keep the cash rate unchanged in August was largely anticipated, but expectations of a rate cut later this year are increasingly fading.
The RBA uses the cash rate to keep consumer price inflation (CPI) within its target range of 2% to 3%. When inflation rises, the RBA increases the cash rate to curb borrowing and spending; when people borrow less and spend less, it slows down inflation and helps to keep prices lower for everyone.
Conversely, low inflation indicates weaker levels of economic activity and so the RBA decreases the cash rate to encourage people to borrow and spend, thus boosting growth.
Latest cash rate decision
While inflation has fallen substantially since its peak in 2022, thanks to higher interest rates, the RBA says it is “still some way” above the midpoint of the target range.
Furthermore, inflation is “proving persistent”, having risen 3.9% over the twelve months to the June 2024 quarter.
Therefore, the outlook remains “highly uncertain”.
When will rates drop?
Westpac, which initially forecast a rate cut in November, has revised this expectation to February 2025. CommBank and NAB forecast the first cut to be in December 2024 and June 2025 respectively, while ANZ predicts it will be in May 2025, followed by quarterly cuts until mid-2026.
How interest rates affect property prices
When the RBA raises the cash rate, lenders might increase homeowners’ variable home loan interest rates, resulting in higher mortgage repayments; when the cash rate is cut, loan rates may be lowered, thereby reducing repayments.
Low rates generally make borrowing more affordable, leading to higher demand for property. This increased demand can push property prices up.
Similarly, when interest rates – and, thus, mortgage repayments, are high – there is lower demand for homes and subsequent downward pressure on property prices.
Property prices in Australia
However, despite high interest rates, property prices in Australia have steadily risen. This is due to the country’s ongoing supply and demand imbalance; there are just not enough homes on the market for the number of interested buyers.
And, with the cash rate expected to remain steady over the coming months, and possibly drop in 2025, property prices are forecast to continue rising over FY25, according to Domain.
“Constrained supply is expected to be the predominant factor influencing property prices in the short term, leading to continued price increases across most cities during FY25…”
Therefore, property investors looking to buy in the next year may benefit from doing so before prices rise further. This does, of course, depend on their particular circumstances.