Interest rate hikes 'key driver of fastest housing downturn in 40 years'

A LEADING property data firm has warned that "restrictive interest rate rises will continue to impact the confidence and financial capacity of potential buyers".

Cotality said the latest Reserve Bank cash rate rise was expected but the run of rate increases have had a significant impact on residential property demand and been one of the key drivers of the fastest downturn across the combined capital cities over the past 40 years.

§ Higher mortgage costs and reduced borrowing capacity

"The cumulative impact of the five rate increases in 2026 has lifted mortgage costs and reduced the borrowing capacity of households," Cotality said.

"Based on the average owner occupier mortgage in the June quarter (almost $742,000), mortgage repayments are now around $600 a month (or 14 per cent) higher than where they stood in January.

"Similarly, the borrowing capacity of the median income household is around $88,000 lower (or 12 per cent) following this fifth hike than at the start of the year."

§ Buyers retreat as sales volumes and home values fall

Combined with existing affordability constraints, cost-of-living pressures, pessimistic consumer confidence and the retreat of investors following May’s Federal Budget, higher interest rates have driven potential buyers to the sidelines, Cotality said.

"Our estimate of sales volumes for the combined capitals in the three months to October was almost 26 per cent lower than the same period last year," the firm said.

"Home values in the combined capital cities have fallen 8.1 per cent from the peaks of March, close to the record peak-to-trough decline seen between late 2017 and mid-2019." 

§ Inflation outlook materially worse than forecast

The probability of this rate increase rose in the latter part of October, particularly following commentary by deputy governor Andrew Hauser that noted the inflation outlook was materially worse than the RBA had previously forecast, citing higher energy costs, the AI investment boom and capacity constraints in the economy.

Hauser also highlighted concerns that inflation expectations in the business sector were moving higher and downplayed the recent increase in the unemployment rate.

"The former is particularly important as prolonged above target inflation erodes the credibility of the RBA’s inflation target, with Hauser describing the higher inflation expectations as a central banker’s nightmare," Cotality said.

The latest inflation data showed a fresh spike in the headline measure, with the CPI increasing by 4.3 per cent year-on-year in September (from four per cent year-on-year in August).

Higher automotive fuel costs were a key driver, with the component up by almost 24 per cent, while housing costs have also remained elevated.

Underlying inflation, as measured by the trimmed mean, edged up to 3.6 per cent year-on-year The quarterly growth in this measure has moved higher in recent months, highlighting the RBA’s inflationary concerns.

"We note that there are some further upside risks to inflation in the near term related to the housing market," Cotality said.

"The CPI measure of rent has remained stable at 3.6 per cent year-on-year since May this year, while Cotality’s measure of market rents has steadily outpaced this rate since September 2025.

"There has been an observed lag between these two measures of around 12 months, meaning that higher rents could soon appear in the CPI and rents comprise a sizeable proportion of the overall basket (around six per cent)."

Unemployment has gradually moved higher in recent months, up to 4.7 per cent in September, having previously tracked sideways at around 4.3% between mid-2025 and mid-2026.

"Underemployment, which measures those people who are currently employed but are willing and able to work more hours, remains relatively low by recent historical standards. This suggests that slack in the labour market remains relatively limited," Cotality added.

§ Cash rate uncertainty and the housing market outlook

There remains uncertainty around the near-term direction for the cash rate.

"Pricing in the interbank futures markets on November 2 implied a 36 per centprobability of another rate hike by April, and given the RBA’s apparent focus, there could be another rate rise if inflation remains stubbornly above target," Cotality added.

"For the housing market, restrictive rates will continue to impact the confidence and financial capacity of potential buyers.

"We expect housing values and turnover to continue trending lower in the face of higher interest rates combined with the downside influence of persistent cost of living pressures, weak sentiment and less investment demand post budget.

"It may take rate cuts, which currently look unlikely until the second half of 2027, to underpin a broad-based market recovery."