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While interest rates are expected to drop this year, the rate-cutting cycle may have minimal impact on home values and transaction activity this year, according to CoreLogic.
Property analytics company, CoreLogic, has warned the industry to brace for the potential that incoming rate reductions may only minimally impact home buying activity and dwelling values this year.
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At least one reduction in the cash rate is expected this year, with two of the big four banks predicting a rate cut when the Reserve Bank of Australia (RBA) meets in February and most economists saying that the central bank may reduce rates several times later in the year, too.
Despite widely held views that lower interest rates will bring more buyers into the market (and be positive for the mortgage broking industry), Eliza Owen, head of research Australia at CoreLogic, said that the impact of rate cuts may be smaller than some predict.
In an analysis of the key changes in the economic landscape in 2025 and how they will influence the housing market, Owen said: “Even if the average mortgage rate drops by 135 basis points (the lower-bound of forecasts for the cash rate at the end of 2025), a median-income household could reasonably afford a $593,000 home – still much lower than the current median home value of $815,000.
“A rate of 3.1 per cent by the end of 2025 is also higher than the pre-COVID, decade average (2.55 per cent) that supported strong lending volumes in the 2010s.”
The actions of regulators will also be key in deciding the extent of the impact from lower rates, she said.
“Lending policy could amplify, or nullify, the impact of rate reductions,” Owen said, noting that the prudential regulator has continued to insist that the 3 per cent buffer is appropriate, despite growing calls for the Australian Prudential Regulation Authority to change it.
“Changes to macroprudential settings (the policies used by regulators to reduce credit risk and support financial stability), will likely affect the availability of housing finance.
“Lowering the mortgage serviceability buffer from 3.0 percentage points to 2.5 percentage points (a reversal of the increase in October 2021) could boost home buying activity through increased borrowing capacity.”
However, Owen said that this action from the watchdog is not guaranteed.
“According to APRA’s [The Australian Prudential Regulation Authority] November statement, the risk of financial shocks hasn’t abated, and regulators have warned that high household debt levels are a major concern,” Owen said.
“If household debt levels rise as interest rates fall, APRA could introduce new measures, such as limits on high loan-to-value ratio (LVR) or high debt-to-income (DTI) lending, such as what the RBNZ [the Reserve Bank of New Zealand] has implemented in New Zealand.”
How many rate cuts will there be this year?
Earlier this month, Australia and New Zealand Bank (ANZ) adjusted its cash rate forecast, saying the RBA will likely cut interest rates by 25 basis points (bps) at its February meeting. Its economists believe that there will be two 25-bp cuts in this cycle (in February and August 2025), taking the cash rate to 3.85 per cent.
The major joined Commonwealth Bank (CBA) in its predictions for when a rate reduction will occur. However, while CBA believes the RBA may cut rates next month (if the trimmed mean inflation rate for 4Q24 comes in under 0.5 per cent), it thinks there will be 100 bps of easing over 2025 (one 25-bp cut per quarter). This would take the cash rate to 3.35 per cent.
Other lenders have already begun preparing for rate cuts, with Macquarie Bank dropping some fixed rates earlier this month in anticipation.
Consumer optimism about potentially lower rates has also improved sentiment towards housing, according to research by Westpac and the Melbourne Institute, but the long wait for interest rate relief is taking its toll on borrowers, with the risk of mortgage stress on the rise.
As of Thursday (23 January), markets were pricing in a 78 per cent chance of a February rate drop to 4.10 per cent and expecting a total of 65 bps of rate cuts in 2025 (taking the terminal cash rate to around 3.64 per cent).
[Related: Market downturn to be short-lived: CoreLogic]
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