02.14.2024 Local News

Could Interest Rate Cuts Drive Eastern Suburbs Prices Higher?

Could Interest Rate Cuts Drive Eastern Suburbs Prices Higher?

Could interest rate cuts cause eastern suburbs prices to rise faster than anywhere else?

Higher interest rates have been one of the main features of the property market over the past two years. Now, at a time when it looks like they may come down, will the eastern suburbs property market be more impacted than others?

Do interest rates drive property prices in Sydney’s eastern suburbs?

The link between interest rates and property prices is well documented. Lower interest rates reduce mortgage repayments and allow people to borrow more. Theoretically, the more people can borrow, the more they are likely to spend on a home.

One Reserve Bank of Australia study, however, found that interest rate movements didn’t have a uniform impact on Australian house prices. It was more expensive property markets that typically saw ‘greater variation’ in response to interest rate adjustments.

The research also found that more indebted property markets – i.e. those where people had the highest mortgages – also tended to be most responsive to interest rates. And, it’s worth noting here that Woollahra Council registers the highest median mortgage by LGA area in Sydney.

Finally, it also concluded that areas with ‘less elastic’ housing supply – that is, ones where capacity to build new developments was restricted by geography (such as the coast) or building regulations, also tended to be most closely linked to interest rate movements.

In other words, Sydney’s eastern suburbs, with its high prices, larger debt levels and geographic constraints, should be more impacted by interest rate cuts than many other places.

Does the data corroborate this study?

To find out, it’s worth delving into the last few times interest rates were cut, to see what happened to eastern suburbs property prices and how that stacked up to the market more broadly.

Between May 2019 and December 2020, the RBA introduced a series of cuts that took the official cash rate from 1.50% to just 0.10%. The first three of these cuts (which took the rate from 1.50 to 0.75) were implemented to support employment growth, and also to prevent inflation from falling too low – something that’s difficult to imagine right now.

Then, in 2020, the RBA cut the rate three further times, in an attempt to stimulate the economy in light of the COVID pandemic.

These rate cuts seemed to have a profound and immediate effect. At the end of 2019, I wrote that I’d ‘never seen the market bounce back as quickly as it has in the second half of the year’.

Although prices then stagnated when the pandemic first struck, by late 2021, Sydney had experienced a record housing boom, with the city’s median house price lifting 29.6% in 2021 alone. And suburbs, such as Bronte (58.4%), South Coogee (49.5%) and Tamarama (68.2%) were among the city’s very best performers. (Note, each of these suburbs meet all the criteria from the RBA study).

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Not so fast: other factors at play

But before we get too carried away, there are some other things to remember. First, just because eastern suburbs prices rose strongly last time, that doesn’t mean they will again. There were other facts to play during the boom market of 2020-21 (government subsidies, lockdowns, lifestyle, etc), and there are likely to be other factors influencing the property market this time too.

It’s not only interest rates that influence the market – the general health of the economy, unemployment, wage growth, population growth and more can also have an impact. If, for instance, the economy begins performing poorly and wages fall or unemployment rises, this could counteract any sugar hit that interest rate cuts might bring.

That said, in times of economic hardship it tends to be more established areas – such as Sydney’s eastern suburbs – where prices hold up best.

Markets within markets

Another point we often make is that, while interest rates can and do impact prices in some markets, they don’t influence all property types.

We find the prestige market (properties over, say $6.5 million) is more or less immune to interest rate movements. Instead, it’s factors such as the health of the share market, the strength of the Australian Dollar, and the amount of M&A activity that matter more.

That’s because, at the top end of the market, few people buy homes with a large mortgage.

Another market that’s likely to remain just as strong with or without interest rate cuts is the downsizer property market. Again, downsizers tend to be cash buyers and there simply aren’t enough suitable high-end apartments and townhomes in Sydney’s eastern suburbs to meet their demand.

In short…

Interest rate cuts won’t impact all market segments in Sydney’s eastern suburbs equally. However, given the strong prices, high mortgages and supply issues we face, overall, prices in our part of the world are likely to benefit even more than in many other parts of the country.

Want more?

If you’re interested in buying or selling in Sydney’s Eastern suburbs, get in touch.