Markets price in four RBA rate cuts in next 12 months: What it means for the off the plan apartment market
For the first time since the Reserve Bank of Australia began hiking rates in May 2022, markets are pricing in four interest rate cuts within the next 12 months.
At the end of each trading day, the ASX publishes its RBA Target Rate Tracker which calculates the probability of changes in the overnight cash rate based upon the implied yields of very short-term (30-day) interest rate futures.
The ASX’s Tracker as at yesterday’s close shows that markets are predicting the RBA will first cut interest rates by 25 basis points in February 2025, with three more in the run-up to August. The RBA meets eight times in 2025 (February, April, May, July, August, September, November, and December).
The RBA’s official cash rate sits at 4.35 per cent.
Any movement in the official cash rate, and most importantly banks passing on those interest rate changes, will help address several challenges in the off the plan apartment space.
The first one is demand. A lower interest rate environment means buyers will have more money to spend due to increased serviceability. Buyers haven't had an opportunity to extend their serviceability in over two years.
For a prospective buyer wanting to take out a $641,000 mortgage, the average mortgage size across Australia according to the ABS, four rate cuts would translate to over $5,000 in savings per year on average, Finder analysis suggests.
On top of lower repayments, there's increased serviceability, meaning a buyer can spend more than they could if the interest rate is higher.
Average Aussie mortgage repayments
| Cash rate | Average home loan rate* | Average monthly repayment | Average monthly decrease | Average annual repayment | Average annual decrease | |
|---|---|---|---|---|---|---|
| September 2024 | 4.35% | 7.07% | $4,296 | - | $51,552 | - |
| 1 rate cut | 4.10% | 6.82% | $4,189 | $107 | $1,284 | $1,284 |
| 2 rate cuts | 3.85% | 6.57% | $4,083 | $213 | $2,556 | $2,556 |
| 3 rate cuts | 3.60% | 6.32% | $3,977 | $319 | $3,828 | $3,828 |
| 4 rate cuts | 3.35% | 6.07% | $3,873 | $423 | $5,076 | $5,076 |
| Source: Finder, RBA, ABS. *Owner-occupier variable discounted rate. Repayments based on the average loan of $641,143 (ABS data analysed by Finder). |  | |||||
Not only will buyers have more money to spend due to increased serviceability, but the supply of new apartments is likely to increase if borrowing costs for the developers are reduced.
Many developers across the country have new apartment projects ready to launch but are waiting for more favorable news on interest rates. It seemed at the start of the year that rates would be going down by mid-2024; however, inflationary pressure has led the RBA to maintain a hold on rates in each of the five meetings this year.
The Board will meet again next week, expecting to hold the official cash rate again at 4.35 per cent.
