Housing markets set to weaken further as RBA hikes again in November

Cash rate now at an 18 year high as the RBA aims to drive inflation expectations back to its target

As was broadly expected, the Reserve Bank of Australia (RBA) lifted the cash rate at its November meeting to 4.85%. This was the fifth rate hike this year, bringing the cash rate to its highest mark since late 2008. Restrictive interest rates have had a significant impact on residential property demand and have been one of the key drivers of the fastest downturn across the combined capital cities over the past forty years.

The cumulative impact of the five rate increases in 2026 has lifted mortgage costs and reduced the borrowing capacity of households. Based on the average owner occupier mortgage in the June quarter (almost $742,000), mortgage repayments are now around $600 a month (or 14%) higher than where they stood in January. Similarly, the borrowing capacity of the median income household is around $88,000 lower (or 12%) following this fifth hike than at the start of the year.  

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. Our estimate of sales volumes for the combined capitals in the three months to October was almost 26% lower than the same period last year. Home values in the combined capital cities have fallen 8.1% from the peaks of March, close to the record peak-to-trough decline seen between late 2017 and mid-2019.  

The probability of this rate increase rose in the latter part of October, particularly following commentary by Deputy Governor 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.

The latest inflation data showed a fresh spike in the headline measure, with the CPI increasing by 4.3% yoy in September (from 4.0% yoy in August). Higher automotive fuel costs were a key driver, with the component up by almost 24%, while housing costs have also remained elevated.

Underlying inflation, as measured by the trimmed mean, edged up to 3.6% yoy. 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. The CPI measure of rent has remained stable at 3.6% yoy 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 6%).

Unemployment has gradually moved higher in recent months, up to 4.7% 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.

There remains uncertainty around the near-term direction for the cash rate. Pricing in the interbank futures markets on 2 November implied a 36% probability 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.

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.