A promising start!

Although there was some speculation of “will they or won’t they?”, it was no surprise the RBA kept the cash rate on hold this month at their newly formatted meeting.

However, with inflation heading in a sought-after downward direction, to date the rates have had little effect in quelling house prices.

In 2023 Sydney recorded both the smallest decline in annual auction activity and the largest improvement in annual clearance rates. There were 36,844 homes auctioned, resulting in an annual clearance rate of 66.9%. With the break over the end-of-year holiday season, opinions varied on how the market would perform in 2024. But yet again the auction market is off to a strong start.

So what is driving this market?

House prices and interest rates usually have a trending relationship. As interest rates rise, property prices tend to soften or fall. However, in this cycle of increasing interest rates property prices have not followed the trend, instead continuing to rise albeit less rapidly. While borrowing capacity has declined there has still been enough financial resource amongst buyers to keep prices rising.

How did this happen?

There are different schools of thought on this. Some attribute the extra cashflow to household savings accrued during the pandemic. There was less choice when it came to discretionary spending and most were inadvertently forced to save. Some attribute the “bank of mum and dad”, overwhelmingly cashed-up boomers, for being the greatest cohort of buyers of relatively low stock volume. This had the effect of contracting the market to a majority class of buyer which created house price data that was not typically representative of a broader community.

As for the strong start in 2024, easing inflation and the prospect of an earlier than expected rate cut may be contributing to vendors’ optimism to sell at a good price and buyers’ fervour to purchase. However, the risk posed if the disassociation between a capacity to pay for housing and house prices continues is a widening class divide and deepening housing crisis.

The RBA has not ruled out further rate increases and has been warned off dropping them too quickly. Some economists, and indeed financial markets, are pricing in a rate cut by August and another by December this year. For now it seems that the market is remaining optimistic with increased stock levels and robust auction clearance rates and sale prices.