After a slight drop in national home prices in January, February marked a positive shift with the Reserve Bank cutting the cash rate to 4.1%.
This strategic move, driven by the lowest inflation since December 2021, has significantly improved market sentiment and buyer affordability, potentially rejuvenating home price growth across Australia.
January witnessed a slight decline in the PropTrack Home Price Index, with national home prices decreasing by 0.08%.
Throughout 2024, despite sustained demand, the growth rate of home prices decelerated, affected by an increase in available properties and less urgency among buyers.
This market condition was further exacerbated by weak economic factors and persistently high interest rates, which began to reverse previous gains.
The RBA has initiated a rate-cutting cycle, reducing the cash rate by 25 basis points to 4.10% in February, influenced by the lowest underlying inflation rates since December 2021.
This move, supported by low unemployment rates and inflation levels below forecasts, has improved market sentiment significantly.
According to Westpac’s consumer sentiment survey, there was a notable 6.5% increase in consumer house price expectations in February, marking the first rise since October.
The reduction in interest rates has directly impacted borrowing capacities, enhancing affordability and thereby stimulating buyer demand.
This change is likely to increase average borrowing capacity by 2-3%, although this will vary based on personal financial circumstances.
Improved affordability has already been evidenced by strengthened auction clearance rates across capital cities, with notable upticks in Melbourne and Sydney where rates are significantly higher than the averages during the spring selling season.
Historically, Sydney and Melbourne have experienced the most significant increases in home prices following rate cuts, due to their higher levels of debt and dependency on leverage. CoreLogic noted that these areas typically lead in economic recovery, often experiencing substantial property value appreciations with lower rates.
Conversely, Perth has shown a more modest response due to its affordability and the impact of its resource-driven economy.
These variations highlight that while rate cuts generally boost the housing market, their impact is influenced by a range of factors including the labour market, immigration, and regional disparities.
As interest rates are projected to decrease further, the housing market is expected to remain robust, with home prices likely to continue recovering, said Eleanor Creagh (pictured), PropTrack senior economist.
However, the current economic climate and baseline affordability issues may moderate the gains seen in this cycle compared to previous ones.
The expected modest rate-cutting cycle, coupled with ongoing structural challenges such as a slowing population growth and a persistent shortage of new homes, suggests that while the market will improve, the pace of growth may not reach the highs of previous years, PropTrack reported.
Read the PropTrack report on LinkedIn.
