Housing market recovery hinges on inflation and interest rate moves

The Reserve Bank of Australia has held interest rates at 4.35 per cent despite signs inflation is trending downward.

Financial markets had given only a 5 per cent chance of a rate cut on Melbourne Cup Day.

CoreLogic data showed headline inflation had dropped to 2.8 per cent, marking the first time annual CPI has fallen below the RBA’s 3 per cent target range ceiling since March 2021.

However, the RBA’s preferred measure of core inflation – the trimmed mean – remained at 3.5 per cent despite declining from its 6.8 per cent peak in late 2022.

The housing component of inflation, which accounts for 21.7 per cent of CPI calculations, has seen significant moderation.

Housing inflation dropped from 10.7 per cent in Q4 2022 to 2.8 per cent in Q3 this year, partly due to energy rebates that led to a 7.6 per cent fall in utility prices.

New dwelling purchase costs, which represent 8.1 per cent of the CPI, showed reduced growth from 20.7 per cent in Q3 2022 to 4.8 per cent in Q3 2024.

Rental price growth also eased, falling from 7.8 per cent annual growth in Q1 2024 to 6.7 per cent in Q3 2024.

The labour market remained tight with unemployment at 4.1 per cent, though the RBA forecasts this rising to 4.4 per cent by mid-next year.

Australian households have reduced discretionary spending amid high interest rates and living costs, with mortgage arrears returning to pre-pandemic levels as savings buffers diminish.

Most economists expect interest rates to begin falling in the first quarter of 2025, though financial markets are not fully pricing in cuts until June.

Any rate cuts could boost housing market activity through improved borrowing capacity and consumer sentiment, though affordability constraints may limit the extent of any recovery.

Regulators may also tighten lending criteria if household debt levels rise as rates decrease.