Economist says lower repayments offer relief to borrowers but may also push prices higher
As the Reserve Bank of Australia (RBA) continues to lower interest rates, an economist is signalling the likelihood of increased housing demand and potentially rising property prices across the country.
“Lower rates reduce the cost of servicing a loan,” said James Graham (pictured above), a senior lecturer in economics at the University of Sydney. “This is a big deal for Australian home buyers, whose mortgages can be very large.”
The RBA’s recent easing cycle, including a 25-basis-point rate cut in May, has already been followed by similar reductions by Australia’s major banks. Mortgage pre-approvals have picked up in response, pointing to renewed interest from prospective buyers encouraged by the prospect of cheaper loans.
According to Graham, a buyer purchasing a $1 million home with an 80% loan would previously have faced a monthly repayment of approximately $4,796 based on a 6% interest rate. After the May rate cut, that figure drops to around $4,669, saving $127 a month. Combined with an earlier cut in February, monthly savings now exceed $250.
These reductions are also influencing borrowing limits. Lower interest rates increase the amount households can borrow while maintaining the same net surplus ratio – a measure banks use to determine lending capacity after accounting for essential living expenses. Graham noted that, with the rate cuts this year, a household earning $100,000 annually could now borrow about $30,000 more.
However, higher borrowing power across the market may have wider implications. “The rate cut affects everyone at the same time, increasing the borrowing capacity of home buyers all over the country,” said Graham in an article published in The Conversation.
This rise in credit availability can fuel demand, contributing to upward pressure on home prices. Research cited by Graham shows that a 0.25 percentage point drop in the cash rate typically results in a 1.5% to 2% increase in average property prices within one to two years. For a $1 million home, that equates to an added $15,000 to $20,000.
As housing costs climb, first-home buyers may feel the strain. Although initial interest rate cuts offer some relief, increased property prices could erode those gains. Many may rush into the market hoping to buy before further price growth, driven by fear of missing out. Others may opt to wait and rent, especially given that rental prices typically do not shift in line with interest rate changes.
Graham added that, while the cost of existing loans may fall, new buyers will need larger mortgages – and higher deposits – to match rising prices. For example, if a home’s price increases by 2%, the required 20% deposit would also rise by $4,000.
For those still saving, alternative strategies include investing in exchange-traded funds or equities, which may benefit from a lower interest rate environment. “Still, it’s never a good idea to panic,” Graham said. “It’s always important to think through your options before diving into the market.”
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