Recent inflation data shows promising signs for the Australian economy, potentially paving the way for the first interest rate cut since May 2022. The Consumer Price Index (CPI) rose by 2.3% in the 12 months leading up to November 2024, staying within the Reserve Bank of Australia’s (RBA) target range of 2-3%. This indicates that inflationary pressures are stabilizing, which could set the stage for a reduction in interest rates, offering relief to homeowners and prospective buyers alike.
Financial markets are now pricing in a 78% probability of a rate cut to 4.10% at the RBA’s upcoming February meeting, according to the latest ASX 30 Day Interbank Cash Rate Futures data. A rate reduction could lower monthly mortgage payments for homeowners with variable loans and boost disposable income. For those looking to purchase homes, lower interest rates would enhance borrowing capacity, making homeownership more accessible.
Housing Market: Cooling Price Growth and Slowing Rents
While inflation influences rate decisions, it also serves as a gauge for changes in household spending, which includes essential categories like food, clothing, and housing. The recent CPI data shows a slowdown in housing-related costs, including rents, new dwelling purchases, and utility services.
The annual price increase for new homes purchased by owner-occupiers moderated to 2.8% in November, the lowest rate since July 2021. This decline is partly attributed to builders offering promotional deals and discounts to attract buyers, which has helped ease some of the pressure on housing prices.
The surge in building material costs, which spiked during the pandemic due to supply chain disruptions, labour shortages, and higher material prices, has slowed considerably. After peaking at 17.3% in June 2022, building material cost growth has now dropped to around 1% over the past three quarters. This slowdown has lessened the financial strain on builders, contributing to more stable housing price growth.
Additionally, rental growth has slowed as well, despite persistently low vacancy rates and competitive rental markets in capital cities. Increased rental availability in certain areas has tempered rent hikes, keeping the annual growth rate at 6.6% as of September 2024. Renters have also benefited from increased Commonwealth Assistance, which offers extra support to those at the highest assistance level.
Impact of High Interest Rates on Household Budgets
Despite these signs of stabilization, high interest rates continue to strain household budgets, particularly when it comes to groceries, utility bills, and other everyday expenses. As a result, many buyers and renters are reassessing their expectations, with some choosing to downsize or delay property transactions until their financial situation improves.
Consumer surveys from realestate.com.au suggest that many prospective buyers and renters have adjusted their criteria for property type, price, and location. These trends highlight how the ongoing cost of living and interest rate pressures are shaping market behavior.
Looking Ahead: What the RBA Will Consider in February
The RBA will closely monitor the next set of quarterly CPI figures, which are due on January 29, 2025, before making any final decisions on rate cuts. The last quarterly inflation data from September 2024 showed a sharp drop into the RBA’s target range, marking the first time in over three years that inflation had been under control. Should the January data follow a similar trend, the RBA may move forward with a rate cut in February.
A rate reduction would provide immediate financial relief to homeowners and help stimulate the housing market. While high interest rates have kept some buyers on the sidelines, anticipated rate cuts could prompt more market activity, encouraging hesitant buyers and sellers to make moves in 2025.
In conclusion, the latest CPI data presents a mixed yet hopeful picture for the housing market. While inflation pressures are easing, high interest rates remain a concern for many. However, a potential rate cut in February could provide significant relief, boosting both the housing market and broader economic conditions.
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