The RBA kept interest rates on hold at 4.35 per cent at its December 2023 board meeting. The decision was largely expected following last week’s encouraging CPI figure of 4.9 per cent, which followed, 5.6 per cent and an expectation of 5.2 per cent. While it was positive news in the fight against inflation, it is far too early to draw conclusions of success. The RBA board is not meeting again until February 6 next year and this provides an opportunity for great stability in the property market. There remains concern however that a small amount of tightening may still be required and the January CPI data will be key. The fight against inflation is not over as it remains well above the RBA's target rate. 

Most commentators at the beginning of the year expected interest rate increases, and we have seen interest rates rise by 125 basis points. At the same time many expected price falls and we saw a national increase of 8.3 per cent to date, according to Corelogic. Many factors including limited supply and continued demand fuelled by stronger than expected immigration have ensured a very tight residential market. Added to this, and importantly, the unprecedented pandemic relief of $300 billion has not yet fully been exhausted, with a large component sitting in borrowers offset accounts. This has sheltered many borrowers from the 13 interest rate increases and these balances will gradually be drawn down over the coming 6 to 12 months, which will negatively impact mortgage serviceability and property affordability.  

Notwithstanding increasing positive commentary regarding the potential for interest rate cuts we expect higher rates for longer which will mean subdued price activity for the majority of the residential real estate market with minor gains only in 2024 and falls in some areas.

Australia is made up of a number of different markets and whilst these expectations are at a national level, there will continue to be area specific over and underperformance. After 4 years of unprecedented price volatility, we are entering a period of greater stability and a safer transactional environment for those both buying and selling real estate. The top of the interest rate cycle and subsequent price stability should signal a return to the fundamentals whereby quality real estate in good quality areas will outperform. Higher interest rates for longer will see more investment properties come to market, as investors seek higher cash returns. This will create an opportunity for more first home buyers entering the market place in 2024 especially as rental markets become more challenging. The prestige market should outperform being insulated from interest rates and benefitting from escalating international demand fuelled by the weak Australian dollar.