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Incoming reductions to the cash rate will likely further elevate home values, according to property insights company Cotality.
Following on from the surprise decision by the Reserve Bank of Australia (RBA) to hold the official cash rate at 3.85 per cent on Tuesday (8 July), the head of research from property insights and analytics company Cotality, Eliza Owen, has said that an August rate cut is ‘near certain’.
Owen’s analysis echoes that of the major bank economists, who have all reaffirmed their forecasts for a rate reduction when the central bank meets next month.
However, while the move would likely be welcomed by existing mortgagors, lower interest rates would likely incentivise more prospective home buyers into market, further exacerbating high house price growth, Owen commented.
Reacting to the RBA’s move on Tuesday, Owen suggested that “falling inflation, weak retail sales data and continued sluggish performance in GDP per capita, data flows strongly support a rate cut in August”.
However, she warned that this would further accelerate house price growth.
“With lower interest rates increasing the minimum amounts that households can borrow, it is highly likely that increased borrowing will be reflected in higher home values,” Owen said on Wednesday (9 July).
“Rising home values and lower rates may also elicit more sales and listings activity, contributing to an uplift in economic activity through things like real estate services and new furnishings.”
Indeed, Owen outlined that the rate-easing cycle has already resulted in “a broad-based increase” in home values this year.
According to Cotality data, the Home Value Index rose 2.3 per cent – or the equivalent of an $18,000 boost to the median dwelling value in Australia – between the first rate reduction in the official cash rate on 19 February until 7 July (just before this most recent cash rate decision).
Over this period, Darwin has seen the biggest gains, with values rising around 6 per cent since the February rate cut.
Values rose by more than 2 per cent in Sydney, Melbourne, Brisbane, and Perth, over the same time frame, and just under 2 per cent in Adelaide.
However, not all markets have seen an uplift, with Cotality data showing that 16 per cent of suburb-level dwelling markets still saw value falls in the June quarter.
Owen continued: “There is a limit to how much falling interest rates can push up home values.
“The strength of the response in home values depends on many different factors, including the magnitude and number of rate cuts, where property prices are starting from and confidence in economic conditions.”
Cotality’s head of research outlined that when the official cash rate was at a record low of 0.1 per cent (between late 2020 to April 2022), the housing market had just been through a downturn from late 2017–19. As such, the response in the property market was “very strong”, with monthly increases averaging 1.5 per cent a month between November 2020 and April 2022.
“During recent rate cuts, the rate of value growth has averaged just half a per cent a month,” Owen said.
“Nationally, property values are almost 40 per cent higher than in November 2020, consumer sentiment is 14 per cent lower, and confidence measures of economic, trade and geopolitical risk have also deteriorated substantially since the previous rate-cutting period.
“Not only that, but interest rates are being reduced from far higher levels than in 2020.”
When coupling these figures with the fact that housing affordability is at record highs (based on dwelling values relative to household incomes), home value growth will likely be ongoing, but only to a limit.
“When weighing up the overall impact of falling rates on home values, we still expect Australia’s housing market to see further uplift over the course of the year. This largely stems from limited housing supply from both a new-build and listings perspective, while borrowing capacity increases amid lower interest rates,” Owen commented.
[Related: Rate cuts drive pre-approvals rise]
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