Don't bank on home value rises after rate cuts

As of 23 January 2025, the ASX Rate Tracker showed market expectations of a rate cut at 78 per cent in the hotly anticipated February monetary policy meeting and this may very well become a reality should the upcoming December quarter inflation figures (due 29 January) present some downward surprises.

However, according to CoreLogic’s head of Australian research, Eliza Owen, the industry should “brace for the possibility” that a reduction in interest rates may “have little effect” on home values and transaction activity over 2025.

Owen said even if the average mortgage rate falls by 135 bps – which would be a cash rate of 3 per cent – median income households could potentially afford a home at $590,000, far 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,” Owen said.

“A potential window into how Australians would respond to higher borrowing capacity is the Stage 3 tax cuts from 2024.

“While this would have boosted borrowing capacity through higher net income, the housing market saw an anaemic response, with growth in values slowing from June 2024.”

Additionally, Owen said that a loosening over the labour market over the year “might not” have much of an impact on the housing market.

While the Reserve Bank of Australia (RBA) expects the unemployment rate to rise to 4.5 per cent by the end of 2025, the labour market has, so far, held firm and has not shifted significantly from the 4 per cent range over the last few months.

Comparatively, the decade average for the unemployment rate was 5.5 per cent before the onset of COVID-19.

“For the past two decades, there has been a mildly positive relationship between the unemployment rate and housing values, potentially because periods of rising unemployment trigger lower interest rate settings to stimulate the economy,” Owen said.

“For those who remain employed in 2025, lower inflation will also provide a boost to real incomes that could be put towards a deposit or housing transaction costs.”

She said that the “devil will be in the detail of a looser labour market” and its impact on housing throughout the year.

“For example, rising periods of unemployment have historically impacted younger Australians (i.e. 15–24yr olds) more than other age groups, and these younger Australians are more likely to be concentrated in the rental market than in home ownership, thus having more of an impact on rental demand,” Owen said.

“However, there may be localised impacts on housing demand and value depending on industries and regions that face greater job loss.”

[RELATED: RBA should not be hasty with rate cuts, economists warn]

Adrian Suljanovic is a journalist at Broker Daily with more than two years experience reporting on all facets of the third party distribution channel.

Adrian has written for a range of business and finance titles including IFA, Investor Daily and Lawyer’s Weekly before joining the mortgages team in 2022.

He graduated from the University of Wollongong in 2021 gaining a Bachelor of Communication & Media with a major in Digital & Social Media.

E-mail Adrian at: This email address is being protected from spambots. You need JavaScript enabled to view it.