Rate Cut and what it means for the Property Market.
Following weeks of speculation and constantly shifting forecasts, the Reserve Bank of Australia has on Tuesday handed down its first cash decision in 2025, electing to cut Australia’s cash rate by 0.25 percentage points to 4.10 per cent, following a meeting of the board’s governors this week.
The announcement marks the first rate cut since November 2020, when the cash rate was slashed to a historic low of 0.10 per cent to stimulate the pandemic-impacted economy.
It’s also the first overall rate change since November 2023 when rates were raised to 4.35 per cent. However, a small rate cut of 0.25% is unlikely to make a significant impact on Melbourne’s property market. Here’s why:
- Minimal Impact on Borrowing Power
A 0.25% reduction in interest rates translates to only a small decrease in mortgage repayments. For example, on a $600,000 loan, the monthly repayment might drop by around $100. While every dollar counts, this reduction isn’t enough to drastically change affordability for most buyers.
- High Property Prices and Cost of Living
Melbourne’s housing market remains relatively expensive in terms of median incomes, with median property prices still out of reach for many first-home buyers. Additionally, rising costs of living, including utilities and groceries, continue to put pressure on household budgets. A slight decrease in interest rates won’t counteract these broader financial challenges.
- Investor and Market Sentiment
Property investors and homebuyers make decisions based on long-term trends, not just minor rate cuts. Factors such as job security, wage growth, State Govt Land Tax, and broader economic stability play a more significant role in shaping market confidence than a 0.25% rate change.
- Existing Fixed-Rate Mortgages
Many borrowers in Melbourne are still locked into fixed-rate home loans. A small rate cut only benefits those with variable-rate mortgages, limiting the overall market impact.
- Tighter Lending Standards
Banks and lenders have strict borrowing criteria, including serviceability assessments. Even with a slight rate reduction, many potential buyers may struggle to meet lending requirements, reducing the effect of cheaper borrowing.
While a 0.25% interest rate drop might provide slight relief to some homeowners, it won’t be a game-changer for Melbourne’s housing market. Broader economic conditions, affordability challenges, State Land Tax and onerous compliance expenses, and lending regulations play a much larger role in shaping property prices and demand.