Falling house prices could be “cushioned” by rate cut: Vado Private

As national house prices rung in the new year with an end to their miraculous 20-month run of growth and a move into negative territory, sights are now set on the Reserve Bank of Australia’s (RBA’s) next interest rate play.

According to the latest data from CoreLogic’s Home Value Index (HVI) as of 31 December 2024, values descended into negative territory in Sydney (-0.6 per cent), Melbourne (-0.7 per cent), Hobart (-0.5 per cent), Canberra (also -0.5 per cent), the combined capitals (-0.2 per cent) and nationally (-0.1 per cent).

As a result, market commentary has agreed that interest rate cuts will catalyse a “modest rebound in value growth” in 2025.

“This result represents the housing market catching up with the reality of market dynamics,” CoreLogic’s research director, Tim Lawless, said.

“Growth in housing values has been consistently weakening through the second half of the year, as affordability constraints weighed on buyer demand and advertised supply levels trended higher.”

Simon Arraj, Founder and Responsible Manager of real estate private credit specialist, Vado Private, said if the RBA drops interest rates in the first half of the year, home value growth in Australian cities such as Sydney and Melbourne could be curbed.

“We could see some further drop in house prices in Sydney and Melbourne with a recent increase in housing stock marketed for sale, opening up greater bargaining power for buyers and placing downward pressure on house prices,” he said.

“If the RBA keeps rates on hold in the first half of 2025, this elevates the downside risk for property prices. We’re already seeing falling house prices in Sydney and in Melbourne, with high levels of debt and the cost of living weighing on households,” Arraj said.

“The central bank may not want to risk re-igniting inflation, and therefore it could keep interest rates on hold in the first half of 2025. If so, the cumulative drop in house prices in Australia’s biggest cities could mount to between 10% and 12% this year.

“Households may have to brace for higher interest rates for longer many months more as it may not be until the second half of 2025 when Australians see their mortgage costs fall with official interest rates.

“The RBA’s inflation target of 2% to 3% remains a key focus. The central bank will be closely observing the inflation numbers and the labour market and whether the jobless rate continues to tighten below 4% or rises back above that level.”

New building approvals data from November 2024 released by the Australian Bureau of Statistics (ABS) on Tuesday also indicated that the seasonally-adjusted total number of approved dwellings dropped by 3.6 per cent month-on-month, after a 5.2 per cent jump in October. There was also a 1.7 per cent fall in private sector house approvals, adding on to the 4.0 per cent fall seen in October.

Arraj said data from AMP suggested the undersupply of housing in Australia now sits at 200,000 dwellings, propelled by a “gap between building completions and approvals due to delayed or abandoned construction projects”, which has driven higher property prices.

“However, we are also seeing lower building approvals for dwellings compared to three years ago, so the restriction in housing supply could place a floor under any fall in property values in 2025,” he said.