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As the Reserve Bank of Australia’s (RBA) first cash rate decision for 2025 draws closer, an industry expert has warned that a much-awaited interest rate cut could have a negligible impact on the housing market.
The property data company stated that inflation is expected to drop over 2025, with annual core inflation forecast to decrease to 3.2 per cent for November just passed, and even fall below the RBA’s forecast of 3.4 per cent for December.
While two of Australia’s big four banks, ANZ and Commbank, have forecast a rate cut in February, CoreLogic Australia’s head of research, Eliza Owen, cautioned that an interest rate reduction could have a minimal effect on home values and transaction activity this year.
She noted that a drop of 135 basis points to the average mortgage rate (the lowest value forecast for the cash rate at the end of 2025) would result in a median-income household being able to reasonably afford a $593,000 home.
Even though this drop would be welcomed by borrowers, it would not present a meaningful avenue for new investors as a result of the considerably higher current median home value of $815,000.
Beyond this income disparity, Owen also stated that the effect of a higher borrowing capacity could resemble the effects of the recent stage 3 tax cuts in 2024, in which borrowing capacity was boosted through higher net income but resulted in a subdued response in the housing market, with growth in values slowing from June 2024.
With an interest rate of 3.1 per cent by the end of 2025 registering higher than the pre-COVID decade average of 2.55 per cent which drove strong lending volumes in the 2010s, Owen noted that lower interest rates in 2025 are expected to “boost housing values and transactions, but not by much”.
Impact of rising unemployment on the housing market
The RBA also recently outlined that unemployment is expected to rise to 4.5 per cent by the end of 2025, which would see the labour market tighten over the year from the current rate of 4 per cent.
But even though CoreLogic stated that lower inflation and reduced economic demand typically result in a loosening of the labour market, Owen shared her viewpoint that a rising unemployment rate may not have much of an effect on the housing market.
“For the past two decades, there has been a mildly positive relationship between the unemployment rate and housing values, potentially because periods of rising unemployment trigger lower interest rate settings to stimulate the economy,” Owen said.
“For those who remain unemployed in 2025, lower inflation will also provide a boost to real incomes that could be put towards a deposit or housing transaction costs.”
Nevertheless, CoreLogic noted that younger Australians between the ages of 15 and 24 are historically impacted more than other age groups by unemployment, and primarily concentrated in the rental market as opposed to home ownership, consequentially having an impact on rental demand across the nation.
Weighing in on the broader market outlook for the year ahead, Owen commented that “despite rate cuts and easing inflation, 2025 is expected to see lower value growth and sales numbers than last year”.
“This could involve a shallow downturn in values at the start of the year, followed by a mild recovery as inflation and interest rates move lower, real incomes rise and housing supply remains low,” she said.
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