RBA holds rates again – but what does this mean for Australia’s property market?

For millions of Australian homeowners and property investors, the Reserve Bank’s decision to leave the cash rate unchanged at 4.35% will come as welcome relief.

After three interest rate increases earlier this year, the RBA has now kept rates steady for two consecutive meetings, and while that doesn’t necessarily mean the tightening cycle is over, it suggests the balance of risks is beginning to change.

Of course, borrowers shouldn’t expect interest rate cuts anytime soon.

Inflation remains above the RBA’s target range, the labour market remains relatively tight and the Reserve Bank has made it clear that another increase remains possible if inflationary pressures re-emerge.

Domain Chief Economist Dr Nicola Powell believes the second consecutive hold is significant, saying:

“A second consecutive hold would suggest the RBA is becoming more confident that inflation is moving in the right direction.

While inflation remains above target, recent data has reduced the urgency for further tightening and points to a longer period of stability.”

That stability would certainly be welcomed by borrowers, but Dr Powell also makes the important point that steady interest rates won’t suddenly solve the challenges facing our housing markets.

“A hold may remove some uncertainty, but it doesn't change the factors shaping housing market conditions. Affordability remains stretched, buyers are cautious, and rising supply is becoming increasingly influential,” she said.

We’re already seeing that play out. Domain reports that total housing supply across the capital cities has climbed to a seven-year high, giving buyers more choice and creating greater competition among sellers.

At the same time, higher mortgage rates have reduced borrowing capacity and made purchasers increasingly selective about what they buy and how much they are prepared to pay.

Higher rates are already biting

Cotality points out just how significant the impact of this year’s rate rises has been, saying:

“For a buyer taking on the average new owner-occupier mortgage of $735,000 in the March quarter, the three rate rises this year lifted their repayment by just over $350 a month.”

And the impact goes beyond mortgage repayments. According to Cotality, borrowing capacity for a household earning the median income has fallen by 7%, or more than $53,000, following those increases.

That reduction in purchasing power helps explain why our property markets have lost momentum.

Buyers simply can’t borrow what they could previously; affordability remains stretched, and more properties are competing for their attention.

However, Cotality also warns against assuming the interest rate cycle has definitely peaked:

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“While most economists believe that the cash rate has peaked, this is not a foregone conclusion.”

That caution makes sense. Headline inflation eased to 3.8% in June, but the RBA’s preferred trimmed mean measure remained at 3.6%.

Labour market conditions also remain tight, with unemployment at 4.4%, while construction costs, rents and energy prices continue to create inflationary pressures.

The RBA itself has maintained that inflation remains too high and further tightening remains possible if upside risks materialise.

What happens next?

The growing consensus is that even if interest rates have peaked, they are likely to remain around current levels for some time.

Dr Powell says Domain’s view is that

“the balance of risks has shifted away from further rate rises and towards an extended period of stability, with the first cash rate cut not expected until mid-2027.”

Cotality reaches a similar conclusion, saying:

“If instead this is the peak of the current rate cycle, it is unlikely that the Reserve Bank will start cutting rates until well into 2027.”

The RBA has now held the cash rate at 4.35%, but inflation remains above its 2-3% target, so investors would be wise to make decisions based on today’s financial conditions rather than assuming cheaper money is just around the corner.

For property investors, that means focusing on asset selection rather than trying to forecast the next interest rate move. Markets like this tend to expose the difference between investment-grade property and everything else.

With borrowing capacity constrained and buyers enjoying more choice, well-located properties with scarcity, strong owner-occupier appeal and the attributes affluent buyers are prepared to pay a premium for should continue to outperform secondary properties where supply is plentiful.

And while the market may remain subdued for a while, the longer-term fundamentals haven’t disappeared.

Australia’s population will continue to grow; we’re still struggling to build enough homes in the locations where people want to live; and eventually interest rates will fall, and borrowing capacity will improve.

That’s why strategic investors should use this period to their advantage.

Quieter markets offer something that was much harder to find during the boom years - more choice, less competition and greater negotiating power - and those who buy the right property today are likely to be well positioned for the next phase of the property cycle.