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Which Australian Capital City Housing Market Reacts Most to RBA Changes?
It’s rate announcement day, and I’ve been neck-deep in building mathematical models to predict house prices. One of the more fascinating things I tackled this morning was quantifying how much interest rates influence house prices in each Australian capital city. Spoiler: it’s a lot.
How much impact do interest rates have, exactly?
Here’s the breakdown of how much of the variation in house prices is driven by interest rates, based on my models:
- Melbourne: 53.1%
- Canberra: 52.9%
- Perth: 52.1%
- Darwin: 51.8%
- Sydney: 51.6%
- Adelaide: 46.4%
- Brisbane: 46.2%
- Hobart: 42.9%
In real-world modeling, it’s rare for a single variable to explain 50% of the variation in something as complex as house prices. Yet, interest rates are doing some heavy lifting at the capital city level. Melbourne is the most sensitive to rate changes, with Sydney, Perth, Canberra, and Darwin not far behind. Brisbane, Adelaide, and Hobart? A little further back but there is still a huge effect.
Today’s rate cut
The rate cut announced today was no shock—pretty much everyone saw it coming. The only question was whether it would be 0.25% or 0.5%. Most forecasters initially leaned toward 0.5% but dialed it back to 0.25% after the US and China called a 90-day truce in their trade war. With fears of a global slowdown easing, the mood’s more optimistic.
Australia’s economy is closely linked to China’s and has been for decades. The Australian dollar often moves in lockstep with their economic fortunes—when they thrive, we do too. China’s industrial boom over the last 40 years has been a goldmine for our universities, mining, and agriculture. What we’ve done with all that cash? Well, that’s a rant for another day.
What’s next?
Futures markets and the big banks are betting on two more rate cuts this year, dropping the cash rate to 3.35%—a full percentage point below its recent high. These forecasts tend to be conservative, so I wouldn’t be surprised if we see more. I’m fascinated to see how the model backtesting holds up.
My personal gripe
You’ve probably noticed these subheadings popping up in my blogs. Apparently, they make things “easier to read” than normal paragraphs. I’m not thrilled about it—call me old-school, but I think people can handle a few unbroken thoughts. Still, I don’t make the rules, and it’s time to roll with the times.
That’s all for now. I’ll share more insights from my modeling in future posts. For now, enjoy the rate cut—things are looking up!
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Coming Up: Adelaide vs Hobart—Which City Is Next to Boom?
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