Economists are predicting that the Reserve Bank of Australia (RBA) will cut interest rates in 2025. After more than a year of the official cash rate at 4.35%, an interest rate cut would provide welcome relief to mortgage holders and prospective buyers. The question on everyone’s mind is when.
The inflation result for the December 2024 quarter was softer than expected with annual underlying inflation falling to 3.2% from 3.6% in the three months to September, according to the Australian Bureau of Statistics. As a result, some forecasters – including the big four banks – predict that the RBA will make its first cut in February 2025. Others believe the tight labour market – which is putting upward pressure on wages – will hold the RBA back, and that the first rate cut is more likely to occur in the middle of the year.
Impact of rates on the property market
Regardless of when the rate-cutting cycle begins, it will affect the property market. In fact, even the anticipation of a rate cut can impact property, for two main reasons:
1. Buyers fear missing out: One consequence of expected rate cuts is growing FOMO (fear of missing out) among buyers. Lower interest rates make borrowing cheaper, which tends to increase demand and put upward pressure on prices. Buyers may rush to purchase now, fearing they’ll be priced out if they wait. This increase in demand could lead to more competition for properties, making it more difficult for you to secure your ideal property at a favourable price. Additionally, in a market where supply is already constrained, this could lead to further price growth in the months leading up to a rate cut.
2. Sellers holding off for higher prices: On the other side, some sellers may delay listing, expecting more buyers to enter the market when rates drop. This could result in fewer properties for sale before the first rate cut, making competition even fiercer.
But waiting for a cut isn’t without risk. Market fluctuations beyond interest rates – like slower economic growth or weaker consumer confidence – could leave sellers in a weaker position than expected.
Why you should avoid trying to time the market
While it is tempting to make purchasing decisions based on potential interest rate cuts, trying to time the market is notoriously challenging
Property prices depend on more than just interest rates. Employment levels, population growth, housing supply, government policies, infrastructure development and even natural events like floods all play a role.
Predicting how these factors will interact is challenging. Markets also react unpredictably to news and events, making timing even harder.
One risk of trying to time the market is missing out on opportunities to buy your dream home, which may outweigh any potential financial gain from timing the market perfectly.
Attempting to time the market can also be stressful. Constantly tracking trends, analysing predictions and second-guessing your decisions can increase anxiety.
Factors to consider when buying a home
Instead of timing the market, it’s a good idea to focus on practical considerations when deciding when to buy:
1. Personal finances: Carefully assess your financial situation, including income, expenses, existing debt and your credit score. This helps you determine what you can afford to borrow and comfortably repay.
2. Long-term goals: Depending on your reason for buying, your goals will be different. One buyer might have purely financial goals, such as an investor. Another might have non-financial motivations, such as a family wanting to upsize to a suburb with good schools. Focusing on achieving your goals is often a wiser approach than trying to time the market.
3. Location: The location of a property is an important factor in determining its value and long-term potential. You should consider how close it is to employment hubs, schools, public transport, amenities and future infrastructure projects that may increase property values over time.
4. Loan terms: Beyond interest rates, consider other loan terms like repayment flexibility, offset accounts and the loan term. These factors can impact the overall affordability and your financial stability in the long run.
By focusing on these fundamentals, you can make a sound decision that aligns with your long-term financial goals and increases your chances of finding a property that meets your needs, regardless of short-term market fluctuations. The key is to approach the property market with a long-term perspective and make informed decisions based on your personal circumstances.
Looking to secure the right loan for your next property purchase? Shore Financial can help. To discuss your scenario, call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.
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