Financial experts are predicting a potential 10% surge in Australian house prices this year, driven by the combined effects of lower interest rates and income tax cuts, reports The Australian Financial Review.
Jarden chief economist Carlos Cacho emphasized that even without a rate cut, house prices were still expected to rise, but reduced borrowing costs could lead to more substantial gains. He estimated that for every half percentage point reduction in the cash rate, house prices could increase by 4% to 5%.
Cacho's forecast suggested that the price growth could reach 10% this year instead of the initial expectation of 5%, depending on rate cuts. However, Jarden anticipates the Reserve Bank of Australia (RBA) will delay interest rate cuts, with the earliest possible cut in November and more likely in February next year.
Possibility of over-exuberance
Cacho pointed out that in the 12 months following the first interest rate cut, house prices typically picked up by about 7%.
However, the anticipation of RBA rate cuts could lead to over-exuberance in the market. The Australian Prudential (LON:PRU) Regulation Authority (APRA) might intervene by increasing the serviceability buffer to offset market momentum.
The International Monetary Fund has already recommended reintroducing restrictions on home loans to cool the housing market. APRA currently requires banks to impose a serviceability buffer of 3 percentage points above the prevailing home loan rate.
Impact of interest rate cuts
While some experts expect rate cuts as early as May, there are differing opinions on the impact. Deutsche Bank (ETR:DBKGn) chief economist Phil O’Donaghoe believes that other factors like the labour market, migration and rents play a significant role in supporting the housing market. He does not anticipate a housing market explosion solely due to lower interest rates.
AMP chief economist Shane Oliver expects rate cuts by June but also notes that a weaker economy could initially temper price gains. The ultimate impact on the property market will depend on the delicate balance between rate cuts and economic conditions.