House prices tipped to rise despite interest rate uncertainty, KPMG says

Australian Government’s 5% Deposit Scheme helped more than 21,000 people Homeownership has started as it has expanded to offer low-deposit loans without lender mortgage insurance to an unlimited number of buyers on any income from 1 October, and affordable property price caps have also been increased.

Rynne said in Sydney and Melbourne the scheme was already pushing up prices at the lower end of the market.

“It’s going to push prices up, and the challenge with affordability is unless the key drivers of affordability are resolved, which is basically supply, then what’s going to happen is it’s going to push the affordability threshold up until it peaks again,” he said.

“Then it will calm down because people won’t be able to do it, the market price will be above the set threshold. And the difference you would need to self-finance through financing will not be covered because you won’t be able to meet the bank’s financing requirements.”

Recent research from Cotality found that homes valued below the scheme’s price cap rose by 3.6 per cent in the December quarter, faster than the 2.4 per cent rise above the price cap in the same period; but the research house thinks some investors may be competing with first-home buyers in lower price ranges.

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Treasury modeling of the policy suggests it will slightly increase property prices A modest 0.5 percent over six years.

On interest rates, Rynne assumes that the cash rate will remain stable in the short term and inflation will continue to fall. The next official inflation figures will be released on Wednesday.

But even if the cash rate rose (which he did not expect), he said a 25 basis point increase would only curb price growth but not curb it.

“There are other factors that affect home prices, and interest rates are really a short-term driver,” he said.

This comes as many forecasters expect property prices to rise this year. Recent Domain research predicts Sydney house prices will rise 7 per cent this year and 6 per cent in Melbourne. The four major banks are forecasting mostly single-digit house price increases.

AMP chief economist Dr Shane Oliver expects property prices in Australia to continue rising due to interest rate cuts in 2025 and the ongoing housing shortage helping to boost values.

But Oliver said the growth rate was unlikely to be that strong until 2026, with property prices potentially rising by 5-7 per cent nationally compared to 8.5 per cent last year.

“Economists tend to be split between suspending interest rates or raising them, and the money market is pricing in about two increases this year, potentially starting next week,” he said.

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“So there’s been a big reversal in interest rate expectations and that will act as a dampener on the property market.”

Further deterioration in affordability will also limit prices and push buyers towards cheaper options such as units, Oliver said.

“The data shows that we are seeing more strength at the more affordable end of the market at lower price points rather than at the higher end,” he said.

For this reason, Oliver said that housing units can increase faster than housing units and that 7 percent growth in housing and 5 percent growth in housing is predicted in 2026.

He said the government’s aid to first home buyers was providing support to the lower end of the property market.