What Next? 

The cash rate hit an historic low in Australia in November 2020 of 0.1%. 

In addition, piles of stimulus money were thrown onto an already heated asset market, and we’re still paying for the inflationary hangover and debt burden today. 

Doesn’t 0.1% just seem ridiculous now?

For those on sub 2% mortgages, owning a house (and by that, I mean paying a mortgage) literally cost one third of what it does today.

You could upgrade your home from a $2,000,000 one to a $4,000,000 one and still have better cash flow than a few years prior, when mortgage rates were at a more sustainable 4 – 5%. 

Well, that didn’t last long.

Flash forward to today and we are eagerly awaiting our first rate cut in 50 months, having seen 13 increases in 2022 – 2023.

So, what will happen next for the Melbourne property market when rates are finally cut?

CoreLogic have published analysis that in previous rate cutting cycles, property prices in key Melbourne areas such as Bayside and Manningham rose by an average of 17% for each 100 basis points of rate cuts. 

It would be reasonable to deduce that if we are to see the predicted 75 basis points of cuts in 2025, prices in our market could increase by 12-13%. 

But if we let history be our guide, price expectations have little bearing on where prices actually end up going. It’s anyone’s guess. 

For what it’s worth (not much), here are three possible scenarios that could play out this year when rates are finally cut:

Scenario One: Nothing changes.

Like New Zealand, the market remains flat or even continues to soften for several months after rates are cut.

Theory: Any buoyancy in demand through improved sentiment and slightly higher borrowing capacity is offset by an increase in listings, as potential vendors, who have been waiting for rates to drop, finally bring their homes to market and supply materially increases and outstrips demand. Buyers keep looking for value, and investors continue to sit on the sidelines. 

Outcome: This would be welcome news for buyers but not great for sellers.

Scenario Two: The market starts to improve incrementally.

Theory: Buyers predict that a rate cutting cycle will bring about a price recovery but it will be slow, so while it may be a good time to buy, there isn’t much urgency. 

As long as listing volumes remain stable, we would see some modest price growth in 2025. This is what most banks are predicting. 

Outcome: A balanced market with more optimism than 2022 – 2024, but without the heat of previous bull markets. 

Scenario Three: The market takes off

Theory: Buyers decide that now is finally the right time to buy and start piling into the market. 

Given that their mortgage repayments should fall in the short to medium term, they can be more bullish and borrow more, given serviceability will improve as rates decrease.

Buyer demand outstrips the supply of listings, with a ‘herd’ mentality and some FOMO returning to the market. 

Investors stop selling as they finally see some potential capital appreciation and interest rate relief. 

We also see an influx of new demand from interstate investors from Sydney, Brisbane, and Perth, looking for better value than their local markets. 

Outcome: We get a run on in prices, and it becomes our first seller’s market since 2021. 

What’s your prediction?

I’d love to hear from you.

Feature Property: 27 Findon Street, Malvern East