US Fed interest rate cuts: What's next for home prices?

Everyone’s been talking this week about the US announcement on the change in Fed rates.

While we’re sure the majority of prospective property buyers are relieved about the news of the cut in interest rates, many of us are still trying to understand what this all really means.

What does the Fed rate cut mean?

The Fed’s lending rate serves as a benchmark for banks when determining the interest rates they charge customers on loans, such as mortgages and credit cards.

Over the last year, interest rates have been at their highest level since 2001 sitting at around 5.3%. This made borrowing expensive for many around the world, effectively keeping some buyers and sellers on the sidelines waiting for prices to come down, or hoping that their current mortgages would become more affordable.

With the rate cut, borrowers can expect some relief. In fact, mortgage rates have already started to drop slightly since 2023 in anticipation of the cut.

In addition to this, savings account rates are also expected to fall as banks adjust to the lower lending costs.

Why was this cut made?

While central banks in regions like Europe, the UK, and New Zealand had already cut their rates, the US Federal Reserve had lagged a little behind in doing so.

The Fed's decision to raise rates started in 2022 aimed at combating inflation, which had reached its highest levels since the 1980s. Higher interest rates make borrowing more difficult, which reduces consumer spending and cools the economy - helping to stabilise prices. With inflation stabilising at 2.5% as of August, the Fed is now shifting its focus to job market concerns, as unemployment has been rising over the past year.

What the US interest rate cut means for Dubai

The US Federal Reserve has cut interest rates by 0.5%, while most were expecting it to be 0.25%.

Expect lower borrowing costs

With lower interest rates, borrowing money becomes cheaper including for home loans and other types of debt.s.

It also means that auto loans and credit card debt will be easier to manage. For those who’ve been hesitant to take on new loans, this is welcome news!

Global affordability will increase

Countries with currencies linked to the US dollar, such as the UAE will tend to adjust their interest rates based on the Fed’s decisions. So, this cut could also mean lower borrowing costs for people in Dubai.

Moreover, the cut is likely to give the US stock market a boost. Lower rates make it cheaper for companies to borrow money, reinvest in their businesses, and drive profitability. Additionally, savings accounts and other low-risk investments become less attractive, often pushing investors toward stocks, which tends to raise share prices.

No slowdowns in the property market

In Dubai, the rate cut could make mortgages more affordable leading to increased demand for real estate - which means there should be no signs of the market slowing down anytime soon!

This is especially important for the luxury market, where high-end properties in areas like Jumeirah Golf Estates (where Allsopp & Allsopp holds a 47% market share) and Palm Jumeirah could see more interest as financing becomes cheaper. That comes as an added bonus after we noticed in our August 2024 market snapshot that luxury market sales had doubled from the previous year, up by 100%!

Added to this, Dubai while seeing the highest of all-time average square foot price, remains one of the cheapest property markets globally with an average square foot price of just AED 1,439!

With inflation rates in a more stable position, the focus has shifted to boosting economic growth and job creation. While these effects will mainly be felt in the US, global markets like Dubai are likely to feel the benefits as well because many North Americans have considered relocating to Dubai for its lifestyle, stability and booming property market returns.

Thinking of your next mortgage?

You can get in touch with our in-house mortgage team to learn more about the fed cuts and how much affordability could change for you.