Property developers and homeowners could see relief as early as next month after Australia’s inflation rate dropped to its lowest level in four years.
The Australian Bureau of Statistics reported that the Consumer Price Index rose 2.4 per cent in the year to December, down from 2.8 per cent in October, while the trimmed mean measure fell to 3.2 per cent.
The results exceeded market expectations and strengthened the case for an early rate cut by the Reserve Bank.
“This opens the door for a rate cut probably as early as next month on February 18,” CoreLogic’s head of research, Tim Lawless, told The Urban Developer.
“If not February then almost guaranteed it’s going to be in April.”
As well, new home construction costs had their first quarterly fall since June of 2021.
“The cost of new home building started to moderate as project home builders offered incentives and promotional offers to attract new buyers due to weak demand,” ABS head of prices statistics Michelle Marquardt said.
But Lawless remained cautious about sustained decreases to construction costs.
“The feedback I’m getting from the industry is that there’s still a lot of tension on construction pricing particularly in labour markets and just scarcity of trades,” Lawless said, suggesting the recent 0.2 per cent drop might be “a bit of a blip” rather than a trend.
Master Builders Australia chief executive officer Denita Wawn said Australia would only be able to boost housing supply “when the cost of new home building starts to moderate, and project costs stack up”.
“Builders have been feeling the impact of prolonged high interest rates on business costs and their forward books as people are holding off investing in new projects,” Wawn said.
Lawless said planning approvals remained a significant hurdle for developers looking to bring new projects to market.
“It’s always going to be a challenge getting approvals through the system with enough speed and flexibility from government councils, especially just as we start to see the flow of approvals picking up,” he said.
“Beyond approvals, the most important challenges for builders and developers will be availability of labour and project feasibility.”
The data revealed housing affordability remained a key concern, with rents rising 6.2 per cent over the past 12 months.
While this rate of growth appeared significant, Lawless said rental increases had been moderating since mid-2023—good for house-hunters and yet unlikely to deter investors.
“Investors tend to focus a lot more on the outlook for capital gains and rental vacancy rates and rental yields. Rent rates stabilising is important, but probably not the main consideration for a lot of investors,” he said.
For developers considering new projects, Lawless said there were several key indicators to monitor, including inflation and interest rate trends, credit policy changes, household debt levels, and supply indicators.
He said the RBA would be “quite focused on watching the level of household debt in Australia which is already elevated”.
“If household debt rises—particularly housing debt—as interest rates come down, then it could trigger a credit tightening event which we know would probably have a tampering effect on market activity,” Lawless said.
The response to rate cuts is also likely to vary significantly by region.
“We’re already starting to see a pretty decent trend in approvals develop in Western Australia and South Australia and Queensland but New South Wales doesn’t seem to be responding from supply perspective and that probably just highlights some of the challenges in that market around feasibility, affordability and bureaucracy,” Lawless said.
For the broader property market, Domain chief of research and economics Nicola Powell said inflation data could prompt significant changes.
“It’s encouraging to see underlying inflation showing a clear decline, a trend which provides confidence that inflation is sustainably heading back towards the RBA’s target range,” Powell said.
Master Builders Australia chief economist Shane Garrett said that althrough owner-occupier home purchase costs decreased slightly during the December quarter, “the cost of a new home is still 39.5 per cent higher than it was five years ago”.
However, a potential rate cut could provide substantial relief to the sector.
RateCity forecasts indicate a 25 basis point rate cut would reduce repayments on a $500,000 loan by $75 a month, potentially stimulating development activity and property purchases.
However, Lawless cautioned that not all markets would respond equally, saying that “markets that are probably best positioned to benefit from lower rates are going to be those that are coming out of a fairly soft period like Melbourne and maybe Hobart ... but I think the affordability constraints in markets like Sydney are still going to be a factor”.
Industry leaders said the Government now needed to focus on balanced policy responses.
“The Government is not off the hook just yet,” Wawn said.
“This federal election we are looking for policies to make home building even more attractive including critical infrastructure investment, lower business taxes and charges, speeding up approval processes, and addressing workforce shortages.”
The Reserve Bank board next meets on February 17 and 18. Economists from the Commonwealth Bank and ANZ are forecasting a rate cut, while others suggest May is more likely for the first reduction.
It would be the first rate cut since November 2020.
