What’s in store for interest rates in the short term?

With the decision from the Reserve Bank of Australia (RBA) to once again leave the cash rate on hold, confidence is very quickly coming back to the property market.

With listings still tight, strong demand and prices rising steadily for the past six months, sentiment has very quickly changed. Buyers are now feeling confident, with many of the belief that interest rates have either topped out or are very close.

We’re also seeing this with what the banks are offering with their fixed-rate loan products. Fixed rates have been falling recently, which is normally a good leading indicator of where they think rates might be headed in the future.

While things might be turning positive, it might be too soon to assume that rate cuts are a forgone conclusion.

We have to remember that the reason the RBA started hiking rates so rapidly, was to try and tame the runaway level of inflation that was hitting consumers hard and making life more difficult for everyone.

At its peak, CPI reached 7.8% for the December quarter of 2022, but there were many areas of our lives that were seeing prices rising well above those levels. Just think about what you’re paying at the supermarket and it feels like prices are up a lot more than 10% on most items.

The same is true of housing costs, especially for renters. Rents have been rising for 2-3 years now at around 10% per year, which is a huge portion of most people's household budgets. It also makes up a large portion of CPI.

Officially, inflation has fallen to 4.9%, however, this is still well above the target band of 2-3% that the RBA is aiming for. Another factor that is making it hard to get inflation down is the cost of services. Services inflation is tracking higher at 6.1% and this is going to be a key consideration for the RBA going forward.

At this stage, markets are now starting to price in interest rate cuts towards the end of 2024, however, there is still a lot of work ahead for inflation to reach 2-3% which could warrant interest rate cuts.

The other consideration is that if interest rates are cut, then it might also indicate there are some other areas in the economy that are struggling. The most obvious one would be the level of employment. Should unemployment rise, then that would certainly pull down inflation, however, that might not be that bullish for the economy or housing.

For the time being, tight listings, the huge influx of immigration and improving sentiment are doing a lot to help prop up the housing market.

SQM Research managing director Louis Christopher recently said that with the RBA keeping rates on hold this month, we are likely to see an increased level of buyer FOMO which in the short term will help boost prices even further.

However, for the time being, we shouldn’t be banking on rate cuts in the short term. There might be some other factors that help, for example, if APRA were to reduce their serviceability limits.

But until inflation gets back in check, it’s likely that we could see interest rates remain around current levels. Even with higher interest rates, there is still plenty of demand to drive property prices in the short term. But if we were to get a surprise cut, you can bet that would boost home buyer sentiment even more.