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Are we about to see a property boom because of the 25 basis points rate drop that just happened recently? With already two rate cuts this year, is this a third that creates massive price growth? In this episode, I'm going to walk you through the history of rate cuts and how they affect property prices in the past, and can they actually trigger a boom? And if so, where does this rate cut most likely affect? I'm Joma, lead research analyst at InvestorKit.
Let's get into it. Does interest rate drops lead to growth? Short answer is yes, in general. If we look back into the past 20 years, the first one was during the global financial crisis in 2008. Cash rate dropped above 7% to 3%.
The second period was from 2011 to 2017. Cash rate dropped from 4. 75% all the way down to 1. 5%. And then the third time was from 2019 to 2020, when cash rate dropped from 1.
5% to the historic low 0. 1%. All these three rate cuts triggered property price growth, but to different degrees. After the first rate cut, national house prices increased by 19% from 2009 to 2010. And during the second rate cuts period, national house prices increased by overall 33% in five years.
But different cities reacted to that rate cut differently. If we only look at capital cities, Sydney experienced a boom. Melbourne followed Sydney, but it didn't actually experience a boom because over the five years, the annual growth was actually just around 6%. While Brisbane, Adelaide and Perth, they didn't really grow much. And the third rate cut led to the COVID property boom that everyone is familiar with.
So in short, interest rate cuts do lead to property price growth or even booms, but to different degrees in different locations and in different time. Now, let's have a look at how interest rates affect different locations differently. So first, we look into the history. The 2008 rate cut led to probably boom in all five major capital cities from Sydney to Perth. And then the rate cuts from 2011 to 2007 had very different effect on these five cities.
Sydney's house prices increased by 77 and that is 10% per year. Melbourne, as I mentioned before, just saw 6% per year growth. Brisbane's annual growth was just 2. 7%, while Adelaide 2. 2%.
So basically, they were just increasing alongside with inflation. While Perth, because of the end of the mining boom, house prices just increased by 4% in five years. And that is equal to 0. 7% per year. Very different impact from the rate cuts.
After the rate drop from 2019 to 2020, while all capital cities experienced boom after that, the timing was quite different. Sydney and Melbourne were the first to feel the rate drops. While Sydney reacted the most dramatically in late 2020, Brisbane and Adelaide followed Melbourne and Sydney. And then Perth was the last to start to boom. And the sensitivity to interest rate cuts can be due to a lot of factors, including affordability, so basically price point, market cycle position, as well as the local economic conditions.
For example, Sydney and Melbourne traditionally are the most expensive cities. Buyers usually rely more on financing in buying properties. So naturally, when interest rates are high, purchasing activity would be low. And while the interest rates go down, demand would be increasing. And the second factor, cycle position.
Still Sydney and Melbourne, they were at the 12th of a growth cycle, ready to recover. And the rate cuts gave them a nice boost. Third factor, local economic conditions. For example, Perth. Perth's economy was still recovering in 2020 and 2021, wasn't strong enough to support the property market boom.
It was only in 2022 that economy was thriving, housing demand was high, and affordability also stimulated the demand. Combined with the affordability advantage, it was in 2022 that the local economy became thriving, the housing demand became high, and the housing affordability started attracting a lot of demand from other states that Perth really started to boom. And now let's look at this year, 2025. How have the last two interest rates have affected different regions? At the time of recording, the data available are just the end of May.
So what you're going to see or hear would be just based on May ending data. So from the end of 2024, when rate cuts became more certain for most people, all the way to May 2025, we have seen a lot of sub markets starting to grow faster. Some examples are Manly in Sydney, Essendon in Melbourne, and Fremantle in Perth. Most of these markets are higher priced, at least relative to their local residence income level. For example, Botany's median house price is $2 million, Manly's median price is $3.
8 million, Essendon $1. 4 million, and Fremantle $1. 3 million. So just in line with what we've seen in history, the higher priced markets seem to be more sensitive to rate cuts. But at the same time, we do see a lot of regions or sub markets are not responding to the rate cuts or the recovery in consumer sentiment really actively.
For example, Banyu, the Melbourne SA3 region, Wynnum Manly in Brisbane, Forest Lake, Oxley in Brisbane as well, as well as North Canberra. If we overlap these regions' house price trend line along with the rate cuts and consumer sentiment trend line, we see no correlation at all between them. Banyu, Wynnum Manly, and Forest Lake, Oxley's trend lines are still quite flat, while North Canberra's trend line is still going down. So they're not actually stimulated by the rate cuts at all. So now, based on what we've observed in history, let's see which regions are most likely to feel the impact of the third rate cut this year.
We've seen that affordability and market cycle position are two of the main contributors to this, so we will just make our assessment based on these two factors. First, affordability. When it comes to affordability or unaffordability, Sydney must be at the top of the list. So this interest rate cut and the potential coming rate cuts will likely trigger more demand for Sydney sub-markets, especially in the inner city area and especially those with prices above Sydney's median. Up next, the inner city sub-markets in Brisbane, Adelaide, and Perth.
In the past three years, when interest rates were high, these sub-markets didn't really boom as much as their outer suburbs. Therefore, when interest rates are down, the recovery in demand for these regions will be faster than the outer suburbs, and that would be triggering some more property price growth. And then let's not forget about the smaller capital cities, Hobart and Canberra. These two markets didn't do really well since 2022. Now we are seeing signs of recovery in these two cities.
For example, Canberra's auction clearance rate has been increasing, and Hobart's inventory has started to go down. The market has flattened and just started to go down as well. And at the same time, vendor discount is trending downward. All the indicators are trending to the right direction, and the improvement in affordability because of the rate cuts will give these two cities a further boost on their way to recovery. And then cycle position.
The first city on our list would be Melbourne. Melbourne didn't really do well in the past 10 years. The annualized growth was only 4. 5%, lower than the average of 5% to 7% nationwide. And now it is well positioned at the beginning of a strong growth cycle because of the recovering economy, the strong population growth, including overseas migration and a recovering internal migration, and the market pressure in a lot of sub-markets are actually increasing.
So this rate cut would give Melbourne an extra boost on its way to recovery. And second, we have talked about the inner city sub-markets in Brisbane, Adelaide, and Perth. Their prices will be boosted by the improvement of affordability. What we see ahead would be more of a healthy growth period rather than a boom because these cities overall, they are in the second half of their growth cycle. So even though affordability will be improved, the space for growth in the medium term would be relatively limited.
And when it comes to the smaller capital cities of Canberra and Hobart, we say they will feel the impact because they have started recovering. If there's only affordability improvement, but all the market pressure indicators are not trending the right direction, I don't think they would feel the impact of rate cuts as much. So in summary, interest rate drops do boost property markets, and history has proven that. But the impact on different markets and in different times can be very different. As far as which regions are most likely to feel this interest rate cut, we need to remember that interest rate is only one factor influencing the property market along with many other factors.
So when we make the assessment, we want to consider both the interest cuts factor as well as other indicators, including affordability, cycle position, market pressure, and the relationship between demand and supply. So Sydney, Melbourne, the inner city sub-markets in Brisbane, Adelaide, Perth, as well as Canberra and Hobart are most likely to feel the interest rate cuts effect. So keep an eye on these areas because if all the data are moving towards the right direction and we see more interest rate cuts, we're potentially to see some serious price growth. I'm Joma, lead research analyst at InvestorKit. I'll see you next time.
