When will investors see interest rate relief?

The Reserve Bank of Australia (RBA) has been increasing the official interest rate for the last 18 months in response to rising inflation.?

But, the RBA has held the cash rate at 4.35% since November, leading many investors to wonder when they can expect relief.?

What influences interest rates???

The RBA has been lifting interest rates to bring annual inflation to its target range of between 2-3%.??

But while higher interest rates have seen the country’s inflation rate initially fall since it hit a peak at the end of December 2022, progress has since stalled.?

In fact, it’s actually gone backwards, with the latest Australian Bureau of Statistics (ABS) consumer price index1 (CPI) finding that annual inflation increased to 3.8% for the June 2024 quarter, up from 3.6% the previous quarter.?

According to its most recent quarterly statement on monetary policy2, the central bank is concerned that inflation is coming to target slower than it expected.??

“Demand in the economy is likely to be high for some time due to underlying inflationary pressures. Headline inflation is expected to come down temporarily due to cost-of-living support, before rising again when that support ends,” said the statement.?

However, targeting inflation via higher interest rates can lead to below-trend economic growth. So the RBA has to balance other factors when setting monetary policy besides inflation, such as unemployment.???

Fortunately, Australia’s labour market remains tight. In July, the unemployment rate3 increased to 4.2% according to the ABS.??

“The unemployment rate is expected to keep slowly rising until early 2025 but the expected recovery in GDP growth should continue to support demand for labour,” said the RBA’s statement.?

?

So when can we expect a rate cut??

Following the release of the CPI results which showed that inflation is heading further away from the RBA’s ideal goal of between 2 to 3%, the big four banks changed their predictions on when the RBA will begin to cut interest rates.??

Westpac, which had stuck to an initial forecast of a cut in November, has revised this to February 2025. The Commonwealth Bank has pushed its prediction to December 2024 while ANZ and NAB believe the first cut will come in May and June 2025 respectively.??

Does this mean that investors should hold out until rates start falling to buy property??

Not exactly.??

That’s because property prices have remained strong throughout much of Australia, despite high interest rates,??

This is largely thanks to a lack of supply versus high demand, that has continued to put upward pressure on homes, even in the face of rising borrowing costs.?

It is also likely that this trend will continue as demand remains high.?

Population growth in the country’s capitals has meant there are still more people who need homes. Meanwhile, an increase in the cost of construction, paired with low building approvals, has meant supply remains slow. Labour shortages and regulatory challenges have also exacerbated the supply shortage.?

Opportunity knocks?

Given the economic outlook and the persistent supply constraints in the housing market, savvy investors might see opportunity in the market’s current conditions.??

After all, with supply issues unlikely to be solved anytime soon, and demand expected to climb, property prices will likely continue growing.??

Added to this is the prospect of a rate cut, which would reduce borrowing costs, making mortgages more affordable for buyers.??

This increased affordability could boost demand for properties, putting even more upward pressure on prices.??

This is backed up by Domain’s forecasts, which predict a 3 to 6% increase for houses and 2 to 4% increase for units in the 2024-25 financial year4.??

Buying now means investors could get ahead of these expected price rises.??

Moreover, high borrowing costs have also kept people out of the property market, which has increased demand for rental homes. This has kept the rental vacancy rate5 low at 1.3%, according to SQM Research.???

This, in turn, has seen rents soar, with national prices up 7.8% on average in the year6 to July, according to CoreLogic.??

?

Want to buy an A-grade investment property? A Game Property Advisory can help you. To get started, contact Jim on 0422 446 170 or [email protected].?