Revealed: the housing markets set to get the biggest jolt from interest rate cuts

Sydney, Melbourne and luxury markets around Australia are best positioned to generate property price growth if interest rates drop markedly throughout 2025 and into next year.

That’s the finding of data researchers CoreLogic based on comparative research of other periods when Australian interest rates were tumbling.

The report, co-authored by Eliza Owen, Head of Research Australia, and Robin Han, Senior Quantitative Analyst, said that overall, the markets that stand to gain the most from a cash rate cut could be those that have demonstrated more sensitivity to changes in financial and interest rate settings in the past.

“These are typically the higher-end markets of Sydney and Melbourne, many of which have also seen a substantial reduction in home values amid rate rises,” the report released Monday (10 February) noted.

“A reduction in the cash rate could spur a recovery trend in the high end of the Sydney and Melbourne housing market, which tend to be the bellwether for broader market recoveries in those cities.”

In the face of higher listings that are putting downward pressure on property prices, widely expected interest rate cuts are expected to reignite the market.

CoreLogic predicts that based on previous periods of rate reductions, national dwelling values would increase an average of 6.1 per cent for each 1 percentage point decline in the cash rate.

Those gains would likely be gradual, given the Reserve Bank of Australia would need to make four full quarter percentage point cuts to reach that level, at a time when RBA Governor Michele Bullock remains publicly cautious about the downward trajectory of inflation and the pace of any unwinding of rates.

But if the official cash rate was to fall to 3.35 per cent, it’s the larger eastern seaboard capitals that are seemingly best positioned to generate higher capital growth rates.

The tables below show the Australian house and unit markets that have had the strongest response to cash rate reductions nationally between 2015 and 2019. These markets are also generally down from peak values, suggesting they have had a strong response to interest rate rises since May 2022.

Based on CoreLogic’s analysis, relatively expensive markets have historically shown stronger responses to reduced cash rate settings, especially in the house sector.

Key examples are houses in Leichhardt, Whitehorse and other inner markets of Sydney and Melbourne that have previously shown the strongest reaction to a reduction in the cash rate.

“Sydney and Melbourne houses and units seem to have the most to gain from a reduction in interest rates,” the report noted.

“Unit markets with the biggest response to rate falls have a high price point, a high concentration of investment ownership, or both.

“In Sydney, Melbourne, Hobart and Canberra, many of the markets with a solid response to rate reductions are also seeing values well below their peak under recent interest rate rises, so easier access to credit may trigger a recovery trend in these markets.”

The Brisbane markets that have historically had the strongest reaction to a reduction in interest rates are also relatively expensive. With the exception of Browns Plains, each of the top ten house markets had a median house value of at least $1 million.

Adelaide, Perth real estate markets have less to gain

Adelaide and Perth have been at the forefront of property price growth among Australian capital cities and subsequently are seen as having less potential to push much higher if rates fall.

Both markets are generally perceived as less sensitive to the cost of credit and more impacted by their economic circumstances, especially Perth and the mining sector.

“The relationship between the cash rate and home values is far less pronounced in markets across Adelaide and Perth, which had very different market performance throughout the 2010s – a reminder that housing markets respond to a broad range of factors.

“In Perth and WA, market values were far more influenced by the boom-and-bust conditions in the mining sector than movements in the domestic cash rate target.

“South Australian dwellings had slow and steady value changes throughout the 2010s, before seeing a rapid ‘catch up’ in home values through the Covid period.”

Listings countering rate cut price prospects

Prospects of a rapid reversal of the current easing of conditions in the Australian property market are based on interest rate cuts that are far from a fait accompli.

For now, the increase in the number of properties being listed for sale is having the biggest impact on the market.

Domain’s latest Market Insights for January 2025, released Friday (7 February) highlight a record-high level of supply as the selling season kicks off.

New listings across the combined capitals increased again in January, marking the largest monthly increase since 2019. They reached record highs in Sydney, Melbourne and Canberra, the third highest on record in Adelaide, and the highest since 2022 in Brisbane and Perth.

Domain’s Chief of Research and Economics, Dr Nicola Powell, said homes are taking longer to sell with an increase in days on market across most cities, including Sydney, Melbourne, Brisbane, Perth, and Hobart.

“The continued rise in new stock suggests sellers are encouraged by stable demand and resilient property values,” she said.

“The high chance of a rate cut has potentially also brought some formerly hesitant sellers back to the market.

“The higher supply is giving buyers more time to make decisions and assess the market, meaning the time it takes to sell a home is extending across most capital cities.

“This may be prompting sellers to adjust pricing expectations to get a quicker sale but with a potential rate cut at our doorstep, we could see buyer demand increase again in the coming months.”