Interest rate cut - are we there yet?

Once again, we’ve been reminded that predicting interest rate movements is just as slippery for economists as it is for the rest of us.

The much-anticipated cut to the cash rate didn’t materialise in 2024, but it didn’t stop investors storming into the residential property market.

At one point last year, investors accounted for 38.3% of all new home loans being financed in Australia, the highest level since 2017.

The latest September lending data from the Australian Bureau of Statistics (released in November) showed the number of new investor loans was up 18.8% from the previous year, suggesting investors weren’t exactly waiting around for interest rates to drop.

The total value of those loans was up a considerable 29.5% on the previous 12 months, suggesting they weren’t waiting for home values to plummet either.

As you might expect, growth in the number of investor loans was strongest in the gangbuster price growth states of Western Australia and Queensland, with perennial New South Wales also holding its own.

At the same time, investor lending was more subdued in the floundering markets of Victoria and Tasmania, growing just 5.1%. Both Victorian and Tasmania also recorded higher numbers of previous investor listings being offered for sale, according to CoreLogic.

It indicates what we all probably know: property investors love a bit of capital growth – regardless of what interest rates are doing it seems – but where values are sluggish, some will choose to sell.

Property analysts widely tip the Perth, Adelaide, and Brisbane markets to continue on their upward trajectories in 2025, albeit at a slower pace, while the rest of Australia’s capital city markets are expected to languish or go backwards. It seems Darwin is the dark horse that could go either way.

The expert forecasts are almost universally based on the Reserve Bank making a cut, or cuts, to the cash rate in 2025 which is expected to put a floor under price drops in the falling markets and spur the rising markets even higher.

Property marketplace Domain’s chief of research and economics Nicola Powell said the flurry of investor activity in the past year suggests astute investors have taken advantage of the overall slowdown in market dynamics.

Pictured: Dr Nicola Powell, Domain Chief of Research and Economics

“I think what we’ve probably got are some investors making their move before the cash rate is reduced, because what’s likely to happen is once that cash rate is reduced, and particularly once we see a few rate cuts coming through, we start to see Australia's overall sentiment rise,” Dr Powell told Your Investment Property Magazine.

“We know that investors are sparked more so by capital growth - and the prospects of capital growth - and you can see the locations where they’re going.

“We also know that when the cash rate is reduced, that's going to improve sentiment for all Australians and that means higher rates of turnover and more competition, so those astute investors have been making the moves when buying conditions are better.”

Dr Powell is among many property market analysts predicting that the first cash rate cut of 2025 - whenever that may be - will mark a change of gear in the housing market.

“I think rate cuts will shape 2025, [in terms of] borrowing capacities and the actual confirmation that finally inflation is under control. That's going to provide clarity for many,” she said.

“I think there will be a sigh of relief across Australia when we see that rate reduction actually come through and delivered, and I think it will influence people's decisions. I think some people [have been] holding off their decisions to buy and sell, and that impacts investor decisions also.”

But with interest rates grabbing centre stage, Dr Powell nominated another variable that could well shift the housing market into another gear mid-year and that is the 2025 federal election.

“Housing will be a key battleground for the election and so I think there are things to watch,” she said.

For investors, she noted negative gearing and capital gains tax had already reared their heads in political discussion in 2024 and may well be back on some parties' agendas.

She also suggested the housing market could be affected by election-driven policies aiming to bring first-time or low-income buyers into the market and that may influence entry-level home prices particularly.

“I think with the different policies, that’s going to impact and influence different buyer demands and segments and therefore, price points,” she said.

It is the more affordable end of the market that has already seen the most growth in 2024.

On a national basis, the bottom quartile of market values rose 10.3%, far outperforming the middle and upper quartiles across Australia, according to CoreLogic data.

The top 10 growth suburbs in Australia in terms of capital city house values were all located in Perth with all delivering value increases of more than 30% over the year.

Unit value price growth was shared across Brisbane, Perth, and Adelaide.

As well as owner-occupiers seeking affordability, investors eyeing growth will continue to be active in that segment of the market, property analysts agree.

Refinancing wars reignited

Meanwhile, some financial market analysts are also tipping that a cut to the cash rate may well spark another round of intense competition in the home lending market.

The so-called “mortgage wars” were triggered in mid-2023 when banks and non-bank lenders competed for market share as many Australians rolled off low fixed rates that were available during the pandemic era.

It saw lenders compete to undercut each other’s interest rates and offer cashbacks and other promotional deals to entice refinancing homeowners and investors.

Even before a cash rate cut, many lenders began lowering their home loan interest rates in the second half of 2024 as rates started to fall on global money markets where many source some of their finance.

First, it was fixed rates that began to drop with some lenders then lowering variable rates - a move some analysts believe is to position themselves for another possible round of renewed competition in the mortgage market.

Director of structured finance at international credit ratings agency S&P Global Erin Kitson said refinancing may be “reenergised” when rate cuts finally take effect.

“The prospect of lower rates is likely to boost consumer sentiment and spending decisions,” she told Your Investment Property Magazine.

“Lenders may seek to capitalise on improving consumer sentiment by offering competitive mortgage rates, stimulating refinancing, particularly for borrowers who’ve built up equity in their mortgages.”

Pictured: Erin Kitson, Director - Structured Finance, S&P Global (Image supplied)

She said cash rate cuts will help ease debt burdens across the board, given Australians' high exposure to variable rates. (In 2024, 98% of all new home loans were at variable rates.)

Interest rate cuts will also effectively increase the amount people can borrow which, in turn, can drive property prices higher.

Ms Kitson said while rising property prices increase the amount of debt people need to take on to get into the property market, they also increase borrower equity for those already there.

“Unlocking built-up equity through refinancing may be a strategy deployed by some households to purchase another property,” Ms Kitson said.

“This strategy may gain more momentum when rate cuts take effect, and this can further increase demand for property.”

So, for investors, 2025 may bring a mixed bag.

The long-anticipated cut - or cuts - to the cash rate is likely to bring more buyer competition from owner occupiers who may have been holding off for interest rates to fall.

Any rise in owner occupier and first homeowner activity could also mean a drop in rental demand as new purchasers move into their own homes.

While rental values across Australia remained high in 2024, growth rates were softer as net overseas migration rates slowed.

For those looking to expand their property portfolios, it may pay to keep an eye on the home lending market for rate-cut refinancing offers that could allow access to built-up equity after an extended period of home price growth (in some markets more than others).

The final variable for 2025 is the federal election, due by 17 May, where housing is expected to be a hot ticket issue.

Although Federal Treasurer Jim Chalmers effectively ruled out any changes to negative gearing and capital gains tax in October, there is no telling what could be on the table if there were to be a minority government seeking to win the favour of minor parties and independents.

As ever, it is interesting times.

As well as interest rates, property analytics company SQM Research has thrown population growth, inflation, and broader economic factors into its property value forecasts for 2025.

Below, SQM Research boss Louis Christopher outlines his alternative scenarios:

Property Value Forecasts

We need to talk about Victoria

Victoria has been something of an outlier in national housing data for some time. Many analysts are predicting a cash rate cut won’t necessarily spark a turnaround in its falling market but may put the brakes on it slipping further.

The state’s home values began slowing compared to other states during the pandemic and have been falling since 2023.

During 2024, Melbourne trailed all the Australia capital cities to record a 2.3% fall in its home values over the calendar year.

It’s been an even tougher ride for investors with the Victorian government lowering land tax-free thresholds for investment properties from 1 January 2024.

Although it’s never been revealed how many extra investors were affected by the changes, it’s estimated around half a million investors will pay $4.74 billion over the next four years.

It’s reasonable to suggest it's one of the reasons more former investment properties found their way onto the Victorian market over the past 12 months.

CoreLogic data found listings of previous investment properties in Victoria in October accounted for 29% of the national figure - up 10.6% on the state’s previous five-year average.

PropTrack also ran the data and surmised almost 5,000 more Victorian investors sold up compared to other states since in the nine months since the land tax changes took effect.

The sale of former investment properties may also be due to a combination of sustained higher interest rates, falling property prices, cooling demand in the rental market, and state tenancy regulations.

At the same time, new investor loans are also relatively subdued in Victoria compared to previous years and the significant national jump in investor lending.

PropTrack senior economist Paul Ryan believes this will have an impact on long-term housing construction in the state over the coming years as investors are key for the viability of many high-density projects that require pre-sales many years before they’re completed.

Analysts widely agree things are not looking promising for the Victorian market even with an anticipated interest rate cut, but Domain chief of research and economics Nicola Powell said there may be a silver lining ahead.

“I do think you'll have a slice of investors that will be looking at Melbourne as a market of opportunity,” Dr Powell said.

“What we've had in Melbourne is a market that has underperformed for the last two years, pretty much since around mid-2022, it's underperformed relative to all other capital cities.”

She said with an increase in Melbourne house prices since March 2020 of just 12.5%, the lowest of any capital city, it means value is building.

“There is going to be a point in time where buyers see Melbourne as undervalued, and investors will be watching that,” Dr Powell said.

“So, I think for those investors looking for the long-term hold, they’ll be looking at Melbourne for that opportunity of purchasing a house on the largest block they can afford in a good, family-orientated location where they're going to see the prospects of capital growth in the years to come.

“It's likely not going to be in 2025, but they will be looking to hold because I'm personally convinced that when we get to another proper price cycle, Melbourne has had such a period of underperformance that it is likely to overperform in the next price cycle.”

Photo by Paddy Pohlod on Unsplash