The Reserve Bank cut interest rates for the third time this year, following last month’s surprise decision to keep rates on hold.
The cash rate is now sitting at 3.6%, down from a peak of 4.35% in January.
Lower interest rates have already supported a recovery in home price growth and this week’s cut could add further momentum to growth.
Rate cuts have a significant impact on the housing market because interest rates directly affect both the cost to borrow and how much a buyer can borrow.
Lower interest rates generally translate to lower mortgage repayments, enabling buyers to borrow more for the same monthly outlay.
While the latest cut is great news for existing homeowners with mortgages, for those looking to get into the market, it isn’t as clear cut.
By making it more affordable to borrow, buyers can typically offer more money when purchasing – pushing property prices higher in response.
This was seen in 2020 when the slashing of the cash rate to just 0.1% triggered one of the fastest episodes of property price growth seen in Australia’s history.
Another side effect of lower interest rates is that consumer confidence is usually higher when interest rates are falling as compared to when they are rising.
According to the Westpac-Melbourne Institute Consumer Confidence survey, the first rate cut in February triggered a significant bounce-back in confidence.
In the week following the February cut, realestate.com.au recorded the highest number of buy searches in over three years.
Another factor supporting the housing market right now is the recovery in household budgets. The average household savings rate, which had fallen to record lows in recent years, is now back in line with pre-pandemic levels.
Lower interest rates also support the development and construction sectors.
Developers typically rely on high levels of financing to fund new projects. Lower borrowing costs reduce the financial burden of carrying projects through the planning, construction, and marketing phases.
Importantly, lower interest rates can also stimulate pre-sales activity, which developers often rely on to secure financing in the first place.
When buyers are more confident and able to borrow more, they’re more likely to commit to off-the-plan purchases. This may help kick-start projects that were delayed during the high interest rate environment over the past few years.
With interest rates now lower, and the possibility of a further cut before the end of the year, the question is how quickly the change will filter through to the market.
While price growth is expected to pick up in response to this week’s interest rate cut, it is highly unlikely we will see a repeat of the kind of growth seen in 2021.
Interest rates are moving lower, but remain well above the average levels seen over the decade pre-COVID, while housing affordability remains a significant issue for many.
As we head into spring, the combination of lower interest rates, improved budgets, and recovering sentiment is setting the stage for a ramp-up in housing activity.
Prospective homeowners could see higher levels of competition when looking to buy, with vendors enjoying robust selling conditions.
