Interest Rates and the RBA Cash Rate effect on Sydney and NSW Real Estate – The RBA Interest Rate

What is the RBA?

Reserve Bank Australia (RBA)

The Reserve Bank Australia

First, let's talk about the RBA, which stands for Reserve Bank Australia. The RBA is Australia's central bank, responsible for maintaining stable prices, full employment, and economic prosperity. It does this by managing Australia's monetary policy, which includes setting the cash rate.

So what is the cash rate? Sometimes referred to as the RBA Interest Rate, the RBA Cash Rate is the interest rate charged to Banks on overnight loans between them. Banks borrow from each other all the time so this affects them quite heavily.

It's a critical tool the RBA uses to influence the broader economy. When the RBA adjusts the cash rate, it impacts short-term interest rates across the financial market.

RBA Cash Rate and Interest Rates

Relationship of the RBA Cash Rate and Interest Rates

The relationship between the cash rate and other interest rates is complex. When the RBA adjusts the cash rate, it can affect other interest rates, like mortgage rates and personal loan rates. But how?

Remember when we said banks borrow from each other a lot? By increasing the cash rate, the RBA puts more financial pressure on the banks every time they borrow. This in turn forces those banks to have to charge us, the consumer, higher interest rates to make up for their increased costs.

In turn, what this means is that the RBA doesn’t adjust interest rates directly. It adjusts rates like the cash rate which has a sort of ripple effect by forcing the hand of everyone else.

Why does the interest rate rise?

Why does the interest rate rise and fall?

So why would the RBA want to make the interest rate rise or fall? It seems like low interest rates would allow us all to achieve the Australian dream, right? The RBA takes into account various factors, like inflation, unemployment, and economic growth, before making any changes to the cash rate.

In periods where inflation is getting out of control, which is the rate at which prices for goods and services increase over time, real estate included, the RBA needs to control this.

It might sound crazy, but one of the ways it does this is to increase household financial pressure so much that it stops us from spending money and forces these prices to drop. I.e. the interest rate on our loan for the house we just bought is now so high, we can’t afford to do anything else.

On the flip side, the opposite is also true. In periods of economic downturn, the RBA may take steps to reduce interest rates, keeping the banks competitive and encouraging us to spend more money. Balance is extremely important.

Sydney Property Market Impact

Impact of interest rates on the NSW and Sydney Property Market

So, how do changes in interest rates affect the property market in Sydney and NSW? Well, interest rate adjustments can impact property prices and demand. When interest rates are low, borrowing becomes cheaper, which can stimulate investment and increase demand for property.

High demand increases competition, which means more bids and offers, equalling higher property prices. Conversely, higher interest rates can cool down the market. Purchasers’ bowing power can suddenly become much lower, reducing buyer demand for property. This can force property prices to be pulled back some as affordability is much lower.

Let's look at two case studies of past RBA cash rate changes and their effects on the Sydney & NSW property market at both their lowest and highest recorded points.

Lowest - Pandemic Cash Rate

We’d say the most famous case was during the pandemic when the RBA reduced the cash rate to a record low of 0.10% in November 2020. Thus, interest rates across Australia were reduced to an all-time low. This was done to stimulate spending and keep the economy going in a period that was likely to cause otherwise.

During this time we saw an unprecedented increase in property prices simply because the demand was so high with the supply remaining quite low.

Conversely, as periods like these come to a close, if interest rates remain too low, money comes very cheap. This allows people to borrow money easily and buy all sorts of things like real estate, cars, boats, holidays etc.

Money can suddenly flow so quickly around the economy that inflation can experience a massive spike. It’s here the RBA will have to adjust the cash rate in the opposite direction to keep growth at a manageable level.

Highest - 1990 Cash Rate

In 1990 the government applied a punishing cash rate of a record high of 17.5%. Australia was experiencing a surging economy and the RBA had to hit the brakes on it. Not to mention the slew of other local, political and worldwide issues we faced around that year.

Putting things into perspective, any changes to the cash rate now seem almost negligible, especially considering Australia has averaged a cash rate of 3.84% from 1990 to 2023. Though the glaringly obvious fact here is that property prices are far grander than they were 30 years ago.

The Property Market isn't the only Market

The Sydney property market isn't the only market to feel the effects of inflation

It's not just real estate that feels these effects. We’re sure you’ve all seen how the price of a cheeseburger and fries has changed over the last 10 years. If we allow inflation to remain unchecked, things that are usually deemed very cheap can suddenly not be. Not to mention things that were already considered expensive like property can easily get well away from us.

Strategies for All

Strategies for Buyers, Sellers, and Investors

If you're a buyer, seller, or investor, it's crucial to understand how interest rate changes can affect your property decisions. Here are some tips to help you navigate fluctuating interest rates:

For buyers:

Look for opportunities to lock in low-interest rates and consider the long-term impact of interest rate changes on your mortgage repayments.

For investors:

Keep an eye on interest rate trends and make investment decisions with both short-term and long-term interest rate dynamics in mind.

For sellers:

Understand how interest rate changes can influence buyer demand and adjust your selling strategy accordingly. Yes, this may include the price. But don’t worry, the property you’re looking at purchasing next will most likely have suffered the same effect.

This is our biggest reminder to sellers who are buying the same market. Don’t forget to take into account both transactions. Don’t get lost in the stress of just one of them or you might end up not making the move when in some cases, you may lose more by waiting for the market to increase.

Sydney Rental Market Impact

Impact on the NSW and Sydney Rental Market

Now, let's take a closer look at how interest rates specifically impact rental price in Sydney and NSW. As we've discussed, interest rates can influence things like housing affordability, property investment, construction activity, consumer spending, and more. In this section, we'll examine how these factors come into play in the context of the NSW and Sydney rental market.

Housing Affordability

Lower interest rates can make it more affordable for potential homebuyers to enter the market, which could result in reduced demand for rental properties in the area. This might lead to increased vacancy rates and downward pressure on rental prices.

Property Investment

To complement this, lower interest rates could also make property investment more attractive, potentially increasing the supply of rental properties, further decreasing Sydney rental prices.

On the flip side, higher interest rates can mean more would-be purchasers are pushed out of the property market and forced to rent. This can increase the demand in the Sydney rental market substantially, driving rental price sky-high.

Our own Case Study

Our record for the busiest open home we’ve had for a rental property was during one such time. We had over 90 registered viewers and over 60 groups attend. We can tell you, it was a solid fitness test running up and down those stairs and in and out of elevators.

Construction activity

Construction activity affects the Sydney Rental Market

When it comes to construction activity, lower interest rates can stimulate development projects by making financing more affordable. In Sydney and other parts of NSW, this could lead to an increase in the supply of new rental properties. However, if demand doesn't keep up with the increased supply, rent prices may be negatively affected.

Conversely, high interest rates can slow construction activity, slowing the appearance of new rental properties and keeping the supply the same. In case you haven’t noticed, it’s all about supply and demand.