Australia’s property market has shown signs of recovery after a three-month slump, with house prices rising by 0.3% in February. The increase follows a period of minor price declines, where the national average fell by just 0.4%. This shift marks a positive turn for the housing sector, spurred by the Reserve Bank of Australia’s (RBA) decision to lower interest rates, signaling the potential end of one of the shortest and mildest property downturns on record.
The Immediate Impact of Interest Rate Cuts
While the February rise in property prices may seem modest, it represents a significant reversal from the prior downward trajectory. CoreLogic’s Eliza Owen described the rate cut as having a “cushioning” effect on the market, comparing it to a pilot pulling a plane out of a tailspin. The decision to reduce interest rates, which came after the February 18 meeting, provided a much-needed boost to property sentiment, particularly in high-demand areas and at the top end of the market. Owen observed that the rate reduction “staved off what looked like a bit of a decline,” helping to preserve market stability.
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The RBA’s decision to cut rates was expected, with inflation data suggesting that price pressures were starting to ease. This likely contributed to early market optimism in February, ahead of the official rate cut. Buyers and investors began adjusting their strategies in anticipation of more favorable borrowing conditions.
Buyers Facing a Double-Edged Sword
However, not all buyers are celebrating this recovery. For individuals like Shimam, who is looking for his first home in Sydney’s south-west suburbs, the rate cut presents a dilemma. While lower interest rates theoretically offer the ability to borrow more money, they also push property prices higher, making it more challenging to enter the market. “There’s a correlation between when the interest rate goes down and the prices do go up,” Shimam explained, highlighting the frustration of seeing prices rise just as interest rates fall.
In contrast, sellers are benefiting from the market’s renewed momentum. For example, a house in Punchbowl, Sydney, recently sold for $1.83 million—far exceeding its reserve price. For the vendors, Nancy and her brother, this was a welcome outcome, as they had initially hoped only to meet the reserve price. Their story is a reflection of broader market trends, where demand is pushing prices higher, especially in desirable suburbs.
The Role of Lower Rates in Loan Capacity and Property Prices
Economists are not surprised by the surge in property values following rate cuts. Danielle Wood, chair of the Productivity Commission, explained that lower interest rates allow people to borrow larger amounts, which naturally leads to higher bids in the housing market. The ability to take out bigger loans directly correlates with increased competition among buyers, driving property prices up.
Peter Tulip, former RBA economist and now chief economist at the Centre for Independent Studies, further emphasized that interest rates are one of the most significant drivers of short-term property price movements. He pointed out that interest rates also affect long-term housing trends, although the degree of impact can vary based on other factors such as supply and demand. Tulip explained that the supply of housing, if responsive, could help mitigate the effects of rate cuts by increasing construction and providing more homes for the growing number of buyers.
However, the supply of new homes continues to be a major issue. If the supply of housing was more responsive to changes in interest rates, the market might be able to absorb more demand without pushing prices as high. This lack of supply remains a key factor in driving up property prices, particularly in the largest cities.
Outlook: No Boom, But a Stable Market?
Despite the positive changes seen in February, experts are not expecting a full-fledged property boom. Eliza Owen from CoreLogic noted that while the rate cut provided a much-needed stabilization, the likelihood of a sharp increase in property values akin to the boom of 2021, when interest rates were at 0.1%, is remote. “It’s hard to imagine a material, strong uplift like what we saw in 2021,” Owen said, pointing out that the current interest rate of 4.1% still represents a significant barrier to affordability. Any future rate cuts are unlikely to push prices to new heights, especially given that affordability constraints continue to weigh on the market.
Reserve Bank Governor Michele Bullock also downplayed concerns that the rate cut would spark another housing boom, suggesting that the 25 basis point reduction was unlikely to make a substantial difference in property prices.
Rents Slowing, but Affordability Remains an Issue
While house prices are slowly recovering, the rental market is showing signs of cooling as well. In the year leading up to February, rents rose by just 4.1%, the smallest annual gain in nearly four years. In Sydney, rent growth slowed to 2.6%, returning to pre-COVID levels. This slower pace of rent increases offers some relief to tenants who have faced steep hikes in recent years.
However, despite the slowdown, affordability remains a pressing concern for renters and buyers alike. Eliza Owen pointed out that rent growth is still above historical averages, and for many Australians, the cost of housing—whether renting or buying—remains a significant financial burden.
Melbourne: The First Home Buyer’s Haven?
Among the major cities, Melbourne stands out for its subdued property price growth, particularly when compared to other capital cities like Sydney. According to Owen, Melbourne’s property values have risen by only about 8% over the past five years, which is significantly lower than the 30% increase seen nationally. This relatively slower price growth has made Melbourne an attractive option for first-time buyers, especially when compared to the sharp price increases in Sydney.
A combination of factors, including increased land taxes, changes in short-stay accommodation policies, and subdued investor demand, has kept Melbourne’s property market more affordable than its counterparts in Sydney. Owen also noted that Melbourne’s housing supply has been more robust, particularly on the city’s outskirts, contributing to more balanced market conditions.
Conclusion: A Tenuous Balance
As Australia’s housing market continues to recover, the outlook for 2025 remains uncertain. While the February rate cut provided an immediate boost, experts agree that affordability constraints will likely prevent a significant surge in property values. The broader trend suggests that property prices are stabilizing, but another boom like the one seen in 2021 is unlikely. For buyers, the market remains challenging, with rising prices and limited options. For sellers, however, the current market conditions offer an opportunity to capitalize on the rebound, especially in high-demand areas.
