Reserve Bank rate rise deepens Australia's housing slump

The Reserve Bank of Australia raised the cash rate to 4.85% at its November meeting, a move Cotality said would deepen weakness in the housing market.

The fifth rate rise this year took the policy rate to its highest level since late 2008. Restrictive borrowing costs had already been a major factor in the sharp downturn across the combined capital cities, according to the housing analytics group.

Cotality said the cumulative effect of the increases had lifted mortgage costs and reduced household borrowing power. Based on the average owner-occupier mortgage in the June quarter of almost AUD $742,000, monthly repayments are now about AUD $600 higher than in January, an increase of 14%.

Borrowing capacity has also fallen. A median-income household can now borrow about AUD $88,000 less than at the start of the year, a decline of 12% after the latest increase, Cotality said.

Higher rates were also intensifying existing affordability pressures, rising living costs, weak consumer sentiment and lower investor demand after the federal budget. Cotality estimated sales volumes across the combined capitals in the three months to October were almost 26% lower than a year earlier.

Home values across the combined capital cities have fallen 8.1% from their March peak. Cotality said the decline was close to the previous peak-to-trough fall recorded between late 2017 and mid-2019.

Inflation pressure

The latest increase had been widely expected, with market expectations shifting further in late October after comments from Deputy Governor Andrew Hauser. He said the inflation outlook was materially worse than previously forecast, citing higher energy costs, investment linked to artificial intelligence, and capacity constraints across the economy.

Those concerns were reinforced by the latest inflation figures, Cotality said. Headline consumer prices rose 4.3% year on year in September, up from 4.0% in August, with fuel prices a major contributor after automotive fuel costs climbed almost 24%.

Housing costs also remained elevated, while underlying inflation, as measured by the trimmed mean, edged up to 3.6% year on year. Cotality said the recent quarterly growth in that measure showed why the central bank remained concerned about price pressures.

Rental risk

The group also pointed to upside risks to inflation from the rental market. It said the official CPI measure of rent had held at 3.6% year on year since May, while its own measure of market rents has been running above that pace since September 2025.

Cotality said there has been a lag of about 12 months between movements in market rents and the CPI rent measure. With rents making up about 6% of the inflation basket, any catch-up in the official data could keep broader inflation under pressure.

Labour market conditions have softened, but not enough to ease concern at the central bank. Unemployment rose to 4.7% in September from around 4.3% between mid-2025 and mid-2026, while underemployment remained low by recent historical standards.

That suggests only limited spare capacity in the labour market, Cotality said, leaving uncertainty over the near-term path for rates.

Pricing in interbank futures markets implied a 36% chance of another rate rise by April, according to Cotality. It added that the Reserve Bank could tighten again if inflation remained above target.

For housing, the outlook remained weak as higher borrowing costs continued to weigh on buyer confidence and financial capacity, Cotality said. A broad-based recovery may not take hold until interest rate cuts begin, which currently look unlikely before the second half of 2027.