Gather ‘round for the Reserve Bank of Australia’s (RBA) crystal ball reading! With the cash rate in Australia currently at 4.35%, predictions suggest a gradual drop over the next few years. However, the situation is anything but clear-cut. Although the RBA kept rates on hold throughout 2024, their forward guidance hints that rate cuts are unlikely in the near term — leaving investors and homeowners alike guessing. And the controversy? The mixed signals from the RBA are leaving many questioning whether the central bank is in tune with the realities on the ground — the cost of living pressure is biting hard.
November to February has historically been a decisive window for the RBA. Over the years, these months have often seen significant interest rate movements or policy shifts. For example, in November 2022, the RBA opted to hold rates steady after an aggressive rate-hiking cycle, while February 2023 saw a recalibration of policies to deal with inflationary pressures.
So what could the upcoming November-to-February period hold? Historically, the RBA uses this time to reassess the economy post-holiday spending and to balance international influences — particularly from the U.S. Federal Reserve. In this critical window, the RBA’s decisions often set the stage for the economic year ahead, especially for the property market.
But here’s a controversial forecast: despite widespread expectations of steady rates or slight cuts in early 2025, there’s a growing case for another rate hike in the February meeting. Why? Global pressures and lingering inflation concerns might push the RBA to take a more aggressive stance, ensuring inflation remains well-contained. According to the International Monetary Fund interest rates may need to rise again if Australia’s progress stalls on curbing price rises. This would shock a market currently anticipating rate cuts or at least stability — and throw property investors and homeowners into a whirlwind of recalculations, re-financing and potentially forced selling.
So, What Do the Banks Say?
The big four banks — CBA, Westpac, NAB, and ANZ — have all offered different outlooks on the future of interest rates, adding to the confusion. Let’s break down their forecasts:
As you can see, while all four banks had the cash rate peaking at 4.35% in November 2023, their predictions for the drop differ. CBA and NAB foresee the rate falling to 3.10%, while Westpac and ANZ predict more modest declines to 3.35% and 3.60%, respectively, by the end of 2025.
Given these predictions, most banks are forecasting between 0.75% and 1.25% in total rate cuts across 2025. This will likely be implemented gradually in several step-downs, typically in increments of 0.25% at each RBA meeting. This could suggest around 3 to 5 rate cuts throughout the year, depending on the pace of reduction.
However, if the RBA indeed surprises the market with another rate hike in February 2025, these forecasts will quickly become obsolete, upending investment strategies. Investors banking on falling rates could be caught off guard, with higher borrowing costs further squeezing mortgage holders and property buyers.
The Controversial Impact on Property Markets
Here’s where things get dicey. Property owners and investors are at the mercy of these fluctuating interest rates. If borrowing costs fall, some predict a feeding frenzy in the real estate market, with demand skyrocketing and home prices following suit. But what happens if rates stay high or even rise longer than expected? Higher mortgage payments could force investors to try and increase rents further, leading to accusations of price-gouging from tenants already feeling the pressure of a tight rental market — In Sydney and Melbourne, rental affordability is strained, with tenants often spending 35–40% or more of their gross income on rent, especially in desirable or central locations. For context, housing advocates generally consider a rent-to-income ratio above 30% as a benchmark for “rental stress,” meaning tenants may struggle to cover other essential living costs while paying rent.
In this volatile scenario, a potential rate hike in early 2025 could hit the housing market hard, driving up mortgage repayments and suppressing buyer interest. But it could also fuel higher rents, intensifying the rental crisis. Social media platforms like TikTok, Facebook, and Reddit are already buzzing with discussions of rent hikes and housing affordability, whereas landlords are trying to balance rising mortgage and expenses in providing that same accommodation.
The RBA’s Uncertainty and the Road Ahead
While the RBA keeps us all guessing with its cautious approach, one thing is for sure: the world of real estate investments is more unpredictable than ever. A surprise rate hike in February could devastate those hoping for a reprieve, forcing investors, property owners, and even tenants to rethink their financial strategies. Historically, the RBA has often taken advantage of the economic slowdown toward the end of the year — when consumer activity cools after the holiday rush and housing market activity naturally dips — to reassess its policies and recalibrate its strategy for the year ahead. This pause gives the RBA crucial time to analyze global and domestic trends without the usual noise of heightened economic activity.
For savvy investors, now might be the optimal time to secure property before market dynamics shift. Why? Any future rate drops could easily refuel property prices, driving competition back into the market and pushing home values higher once again. If the RBA opts to cut rates in 2025, this could lead to another surge in demand, making today’s relatively stable property prices a more attractive investment opportunity.
As the philosopher Heraclitus once said, “The only constant in life is change.” Just as the RBA’s decisions remain fluid, investors must adapt and remain vigilant, seizing opportunities when they arise while bracing for the uncertainties ahead.
Article by:
John Wills FAPI CPV JP
Principal
Wills Property
www.willsproperty.com.au
