Insights
How short-term rates and a weaker Aussie Dollar impact the Australian property market
Published
14 January, 2025
When was the last time you checked in on short-term interest rates? Or considered how the strength of the Australian Dollar can impact the Aussie property market?
If you’re like most Australians, the answer is probably very little—or never. So much can influence the property market that many will simply refer to the opinions of headlines, friends “in the know” or—depending on the age group—their parents when asking, “What will happen next?” Beyond that, factors like supply and demand are the two major indicators most will look at before making a property market forecast.
But when you’re playing the game at the highest level, experts need to delve into the minutia, from short-term interest rates to the strength of the Australian Dollar.
Okay, why do we bring up short-term rates and foreign exchange? Because when we sat back down in our chairs for 2025, we noticed that both have slid since we tossed our 2024 calendars in the (recycling) bin. Here’s what we mean in a nutshell:
- Short-term rates (like the 3-month BBSY) are easing, driven by growing expectations of an RBA rate cut in February (or May, depending which bank you ask), thanks to lower inflation data.
- Meanwhile, the Australian dollar continues to weaken, currently sitting at 0.6153—2 cents lower than early December—due to weaker Aussie economic growth, uncertainty around China and a disparity between Australian and US interest rates.
Great. Why does all of this matter?
Economic head- and tailwinds motivate the property game and its players more than (almost) anything else. Want proof? Let’s show you what these two factors can do to a property market.
What are short-term rates and why do they matter?
Short-term rates like the 3-month BBSY (Bank Bill Swap Yield, a benchmark rate that most banks and investors around Australia reference) play a big role in determining borrowing costs. When these rates go down, it’s a sign that the cost of short-term loans and variable rate mortgages might also fall.
For the property market, this translates to lower borrowing costs. If short-term rates continue to fall and the RBA cuts the cash rate, banks are likely to pass on some of these savings to borrowers. This could make home loans more affordable, encouraging more people—even first-home buyers—to jump into the market.
And that means an increase in buyer confidence. Because when rates drop, it tends to create a “now or never” mentality. Buyers act quick to avoid the old FOMO pressure.
That said, investors need to remember that lower short-term rates don’t always lead to a surge in property prices. If economic uncertainty or affordability issues persist, buyers can still hesitate, regardless of rate cuts. This is the strange beauty of property—human behaviour plays an incredibly big role in its movements.
How a weak AUD impacts property
The Aussie Dollar has weakened significantly in the last few years, down to its lowest lever since 2020 against the US Dollar. And while it might not seem like an obvious factor, it can have a big impact on property.
A weaker currency is influenced by things like:
- Interest rate differences between Australia and other countries (e.g. higher US rates are drawing money away from AUD).
- Slower Australian economic growth and uncertainty around China’s economy, which is closely tied to Australia’s export markets.
Now, here’s how the weaker AUD affects the property market:
1. More foreign investment
When the Australian dollar is weak, it makes Australian property cheaper for overseas investors.
A property priced at $1 million AUD, for example, would cost around $615,000 USD with the current exchange rate. Compare that to $735,000 USD if the exchange rate was 0.735. That’s a very appetising discount for foreign buyers.
A weak Aussie currency is a particularly good thing for investors from countries like China, Singapore and the US. These buyers—often with deep pockets—tend to target luxury residential properties or commercial real estate in major cities like Sydney, Melbourne and Brisbane.
2. Increased demand for high-end properties
A flow-on effect is that foreign investment tends to boost demand in higher-end property markets, which could drive price growth in these segments.
While this is good news for developers and sellers, it can make it harder for local buyers to compete.
3. Local economic impacts
On the flip side, a weaker dollar also reflects weaker economic growth, which can reduce local buyer confidence. If people feel uncertain about job security or future income, they might hold off on big investments like buying a home or upgrading to a bigger property.
What does all of this mean for the property market?
When we combine falling short-term rates and a weaker Aussie dollar—two of the many, many, many factors influencing the property market—we see a potential mix of interesting opportunities and challenges for the property market.
Here’s what to watch for:
Opportunities
- More buyer activity: Let’s say the RBA cuts rates and borrowing becomes cheaper, it could boost demand, particularly in the first-home buyer and investor segments.
- Uptick in foreign investment: The weaker dollar is likely to attract international buyers, adding momentum to high-end residential and commercial property markets. For those with a foot in the door, it can increase their property value, so there are two sides to the coin.
Challenges
- Affordability pressures: Yes, short-term rates appear to be falling—but longer term fixed rates are rising. For buyers relying on fixed-rate loans, higher costs could limit their purchasing power. (That said, the consensus is that interest rate reductions will be good thing for buyer affordability.)
- Economic uncertainty: Local buyers might hesitate to enter the market if they’re worried about job security or broader economic stability, even with lower borrowing costs. But, from where we sit, there’s no existing evidence of this nationwide concern.
Watching economic factors can be the key to success
Understanding how economic factors—like short-term rates and the Aussie dollar—influence the property market can help you make more informed decisions. It can help you avoid calamities and safeguard your capital for years to come.
Put simply, we love this stuff. We find the many, many economic levers fascinating to watch and of course very prosperous for our investors when we’re well ahead of these levers being pulled.
2025 is shaping up to be a very interesting year for investors. With a federal election, a new US president, an expected interest rate drop and an existing list of challenges and opportunities in all of our nation’s property markets, there’s never been a better time to have your finger on the pulse.
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