Impact of Today's Rate Cut on Already High Housing Affordability

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Key Points

The RBA has reduced the cash rate from 4.1 to 3.85 per cent.
Rate cuts can lead to moderate increases in property prices according to a market analyst.
Darwin and Melbourne remain the most affordable capitals considering median income and property prices.

The Reserve Bank of Australia (RBA) has reduced the cash rate by 0.25 percentage points to 3.85 per cent, a move that was widely predicted by economists and banks.

In the March quarter, the Consumer Price Index (CPI) stood at 2.4 per cent and the trimmed mean inflation at 2.9 per cent — figures that fall within the 2-3 per cent range the RBA considers healthy inflation, thus raising expectations of a rate cut.

With housing affordability being closely linked to the RBA’s decisions on the cash rate, this much-anticipated decision could influence house prices for those looking to buy property in the near future.

From property market watchers to keen buyers — anyone with an interest in Australia’s real estate sector will be looking for an answer to the big question: Will the rate cut make housing more affordable?

A chart showing the Consumer Price Index and trimmed mean inflation

Source: SBS News

Will the rate cut drive house prices up?

Property market analyst Tim Lawless said a rate cut can be a downside for affordability when you compare dwelling values to income.

He told SBS News that when prospective home owners can borrow more after a rate cut, it historically puts pressure on the housing market.

“We probably will see some additional upward pressure on housing prices as interest rates come down,” the head of research at Cotality, formerly CoreLogic, said.

“We’re already seeing dwelling dollars relative to household incomes quite stretched. In fact, at record highs, we’re likely going to see that stretched affordability potentially worsen further from here.”

He added consumers are also “increasingly pessimistic”, according to consumer confidence readings, which suggests home buyers feel somewhat locked out of the property market.

“There’s a clear relationship between confidence and housing markets,” he said.

“Buying a home is a very high-commitment decision, and if you’re more confident in your ability to hold a job and pay down your mortgage or get financing, then you’re probably more willing to make the high-commitment decision like that.”

Where are the ‘healthy’ property markets?

Home buyers in some cities could be feeling more confident than others, as affordability varies widely from state to state.

Lawless said the most common metric to determine housing affordability is to compare the value of a property with household income as a ratio, also known as the dwelling value to income ratio.

“Melbourne’s got a ratio of seven, which simply means if you’re buying into that market and you have the median household income and you buy the median-priced dwelling, you’re spending about seven times your gross annual income,” he said.

“Melbourne’s down towards the bottom of the pack in terms of that affordability ratio, which is a very healthy thing.”

In comparison to Melbourne, most of Australia’s capital cities are less affordable by the same measure.

Sydney had the highest ratio of 9.8, followed by Adelaide on 9, Brisbane on 8.3, Perth on 7.4, and Hobart on 7.2.

More affordable than Melbourne were the ACT at 6.1 and Darwin at 3.9.

How much could you save monthly if the rate is cut?

If you already have a mortgage, a rate cut of 0.25 percentage points could make a difference to your household budget if the rate stays the same or continues to fall in coming months.

An owner-occupier with a $500,000 loan could save around $76 per month, according to data from the financial comparison website Canstar.

A rate cut can also be a good opportunity to see what lenders are offering customers on a variable mortgage loan, according to Sally Tindall, data insights director at financial comparison site Canstar.

Credit: SBS News

Doing research ahead of time on the offerings of different banks can be a “bargaining chip” in negotiations,” she said.

“For many people, even in the first year or two, the savings you could potentially make would outweigh the effort and the cost of refinancing,” she told SBS News.

Some banks will charge switch fees or have other costs when changing providers.

The information in this article is general in nature and is not intended as financial advice. You should consult with a licenced professional to make the decisions that are right for you.