Key takeaways
The RBA has lifted rates to 4.35%, reversing last year’s cuts as inflation remains too high. There is still a real risk rates haven’t peaked yet.
Inflation is being driven by fuel and housing costs, with core inflation stuck above target. This keeps pressure on the RBA to stay restrictive.
Borrowing power and affordability are falling, with higher repayments hitting mortgage holders and reducing buyer capacity. This is weighing on demand.
Housing market momentum is slowing, especially in Sydney and Melbourne, although lower-priced segments remain more resilient due to first-home buyer demand.
The outlook is uncertain, with markets pricing in more rate hikes while high oil prices could also dampen spending and inflation.
Housing conditions are likely to soften further despite ongoing supply shortages.
Stubbornly above-target inflation and the risk of pass-through from higher oil prices means this may not be the peak of the rate cycle.
In line with expectations, the Reserve Bank of Australia (RBA) hiked rates for the third time in 2026, lifting the cash rate to 4.35% (from 4.1% previously).
This fully reversed the rate cuts the central bank implemented in 2025, taking rates back to the previous cycle peak.
The recent data flow has not been positive, with persistently tight conditions in both the labour market and inflation driving this increase.
This rate hike will negatively impact mortgage holders, particularly those in the early stages of repayment.
The average size of a new mortgage in the December quarter 2025 (currently the most recently available data) was $736k, and the full pass through of this rate increase would lift monthly repayments by $119 per month, or $55 per fortnight.
Similarly, the rate rise will reduce the borrowing capacity of potential buyers, with households on the median income having their budgets lowered by around $18k (assuming average market interest rates and a 20% deposit on a 30-year principal and interest loan).
Headline inflation accelerated to 4.6% yoy in March (from 3.7% yoy in February. Much of this increase was related to higher fuel prices (resulting from the conflict in the Middle East), with headline inflation excluding automotive fuel actually slowing to 3.9% yoy (from 4.1% yoy previously).
Housing was also a key contributor to the inflationary pressures, with new dwelling prices moving up 4.5% yoy (from 3.7% yoy in February), while rental CPI eased marginally.
However the CPI rent measure is lagged, and Cotality data shows an acceleration in market rents in recent months, pointing to the risk of more rental sector inflationary pain to come.
Trimmed mean inflation (the RBA’s preferred measure) strips out some more volatile items, such as fuel prices.
This measure has been unchanged at 3.3% since December last year, sitting stubbornly above the central bank’s target of 2-3%.
Note: The recent stability points to limited pass-through of higher fuel costs to broader prices in March, with anecdotal reports suggesting fuel surcharges didn't come in until April, which also adds upside risk to inflation going forward.
The trend in core inflation will be the most important trend to watch when it comes to future cash rate decisions.
Similarly, the labour market remains persistently tight, with unemployment remaining at 4.3% in March and little changed since April 2024.
- Also read:Rents Keep Rising While Inflation Spooks Investors – What It Really Means for Property | Property Insiders
- Also read:This week’s Australian Property Market Update – Latest Data, State by State May 5th 2026
- Also read:National Listings Steady in April as Market Shows Mixed Signals | National Listings Rise in March
- Also read:Latest Property Price Forecasts Revealed. Australian Property Market Outlook 2026: Where To Now After The Rate Rise.
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The RBA wants to see unemployment trend higher to reduce the inflationary impact from the demand side of the economy.
This latest tightening from the RBA is likely to further dampen overall housing demand
This is a trend that has been evident since late 2025, when the central bank signaled its change in policy stance.
Cotality’s national Home Value Index has continued to weaken, with values rising by just 0.3% month-on-month in April (compared with a 1.3% increase in October 2025), with values falling in Sydney and Melbourne.
However, higher interest rates could further deflect demand into the lower value segments of the housing market, where policy support for first home buyers has seen much more competition and continued growth in home values.
With upside risk to inflation in the near term, there remains the potential for further rate hikes.
At the time of writing, Westpac is the lone Big 4 bank forecasting two additional hikes, with the others tipping the RBA to remain on hold for the foreseeable future.
Interbank markets have another hike fully priced in, with another seen as a high probability by January 2027.
However, high oil prices can act as an effective tax on households, reducing spending on other goods and services and thereby lowering inflationary pressures.
This points to ongoing uncertainty regarding the path of the cash rate heading forward.
Outlook
Overall, for the housing sector, the demand side headwinds are building.
Demand was already impacted by affordability and serviceability constraints prior to the earlier rate hikes in February and March.
With housing affordability remaining a key challenge, mortgage rates up 75 basis points and higher cost of living pressures eroding household balances sheets, sentiment has dropped sharply.
Even with an ongoing housing undersupply, it’s likely that market conditions will continue to moderate from here.
