Firstly a very happy New Year. 2025 promises to be full of excitement with a Federal election months away, the cost of living starting to bite in the economy and The Donald giving us ‘shock horror’ headlines daily.

But now back to the present.

Following the latest decline in the annual inflation rate to 3.4%, all big four banks believe there will be an official interest rate cut later this month, with more cuts to follow. This will help ease the cost of living expense for borrowers (read voters), and make borrowing more affordable.

But what impact will lower interest rates have on the Melbourne property market?

APRA requires Banks to have a 3% servicing buffer above the current loan rate when assessing a borrowers ability to repay a loan.

To borrow $1,000,000 from a bank at (say) 6.5% interest rate, the borrower must be able to meet a $95,000 buffer (after meeting all other expenses). Therefore a 1% reduction in interest rates (to 5.5%) means the bank could lend an additional $117,000 to that borrower. For comparison, the average new home loan in Melbourne is around $640,000.

Generally speaking, if people can borrow more to buy a property they will, and extra borrowing capacity will push property prices up. Falling interest rates will encourage more borrowing and increase the banks ability to lend to those borrowers.

The median house price in Melbourne has softened over the past year (down 3.4% according to Core Logic). I believe this is in part due to lesser quality properties being sold - being former rentals - coming on to the market.

It makes little sense owning an investment property where most of the income goes in rates, insurance, Land Tax, agents fees and maintenance. Unless there is capital growth, I expect this trend to continue.

One unknown factor in assessing the likely impact of interest rates on house prices, is the supply of properties. Estate agents do see more properties coming on to the market in the next few months, but not an overwhelming number. They expect it will continue to be a balanced market.

Agents believe that the top end of the market is strong providing the property is priced correctly. Most buyers are well informed about values and won’t overpay for a property. Asian buyers are still active in that market.

Falling interest rates have a psychological impact on borrowers. The certainty of knowing the future borrowing costs gives them confidence to borrow and buy, as opposed to a rising interest rate environment where the costs are unknown.

It’s probable that it will take a few interest rate cuts to have any material impact on property prices. In some areas (particularly top end), more than 25% of sales are to cash buyers, so interest rates are somewhat irrelevant.

A market segment that is still being impacted are development sites. Building costs are up about 40% since the start of COVID and Melbourne house prices are only up about 9%. For a developer to make money, they need to buy land for a lot less than what it was previously worth. This explains why they are not active in the market at present.

My advice to vendors planning to sell a property, is to ensure that it is well presented and appealing to as many buyers as possible. Even if the house is in poor condition, if it can be improved to appeal to a wider market, it will achieve a better sale price.

We provide a free appraisal to vendors to advise on what should be done to present a property in a cost-effective way. Where our clients don’t have the money to spend on presentation works, we will fund the cost of those works with repayment from sale proceeds. This has benefited many clients who would have otherwise missed out on tens of thousands of dollars.

Call me on 0418 517 643 or Phil on 0402 890 830 if you would like to discuss a property.

Regards,

Robert Allanadale | Director

m: 0418 517 643

Tower Property Advisory is an independent consultancy that specialises in managing the end-to-end process of property sales on behalf of Vendors.