RBA rate hike looms: how Tuesday’s decision could impact property prices – realestate.com.au

The real estate market’s strong momentum is about to be tested as an impending rate hike erodes buyer confidence and reduces borrowing power.

The Reserve Bank of Australia is widely expected to raise cash rates for the first time in more than two years at its meeting on Tuesday in a bid to bring high inflation back within target.

That could push potential buyers to the sidelines as they watch and wait for the RBA’s next move, while the memory of the previous rate hike cycle – and subsequent market correction – is still fresh in the country’s psyche.

PropTrack senior economist Anne Flahery said headline inflation has risen 3.8% over the past 12 months and is well above the RBA’s target of 2-3%. The consensus for an interest rate increase in February has strengthened. The reduced average inflation, which softens the impact of volatile, one-off price movements, is also above target.

“Even though we expect a rise in interest rates following the latest inflation data, I think it will still come as a shock to many people, especially as last year it looked like we were coming to the end of the era of the previous interest rate cycle,” Ms Flaherty said.

“So now that we’re in a situation where interest rates are rising again, I think this is likely to be a blow to confidence. It’s likely to dampen demand and have an impact on market activity.”

According to PropTrack, national real estate prices rose 8.8% in 2025, the strongest annual growth rate since 2021, when record low interest rates and a shortage of real estate listings pushed national home values ​​up more than 20% in 12 months.

Ray White chief economist Nerida Conisbee said continued momentum heading into 2026 suggests higher interest rate expectations are not yet priced into the market.

“Price growth remained broad-based over the summer, indicating that buyers continued to transact as if financing costs would remain unchanged,” Conisbee said.

“This is in clear contrast to the start of last year, when expectations of rate cuts started to influence behavior as early as January, well before the first cut in February.”

The RBA has made a total of three cuts in 2025, raising the cash rate from 4.35% to the current 3.6%.

“While prices have remained stable to date, this does not mean that higher rates would not have an impact if realized,” Conisbee said.

“A rate hike is expected to slow activity, especially in the more interest rate sensitive markets.”

Australia’s average home value rose 0.2% to $883,000 in January, according to the latest PropTrack Home Price Index. This marks the 13th consecutive month of growth and pushes real estate prices to a new record.

But it was patchy across the country, with price falls in Melbourne (-0.1%), Hobart (-0.4%) and Canberra (-0.1%) offset by gains in Adelaide (+0.9%), Brisbane (+0.4%) and Perth (+0.3%). Sydney saw a modest increase of 0.1% and Darwin was flat.

Ms Flaherty said that even with a rate hike this week, property prices were likely to continue rising into 2026, although current forecasts of price growth of between 6 and 8% nationally could be revised lower if the RBA were forced to move again.

“The main driver of home price growth has long been supply and demand, as opposed to where interest rates are,” she said.

“I think a good example is that if you look at 2022, when interest rates were rising super fast, we only saw a short, relatively moderate downturn in the overall market because demand, relative to supply, was quite strong.

“It all comes down to the fact that we currently have a multi-speed market. Some capital cities still have serious housing shortages and there are not enough homes for sale relative to demand,” she said.

Forecasts for house price growth:

Ms Flaherty said Brisbane and Perth will continue to outperform despite interest rate moves due to a severe housing shortage.

“The number of active listings in Brisbane, Perth and Adelaide are down about 45% from pre-pandemic levels,” she said.

Last year there was only one location in the country’s top ten performing markets outside WA and Queensland, with the more affordable peripheral regions of Perth and Brisbane dominating the list.

“The pace of price growth in 2026 will come down to buyer demand,” Ms Flaherty said.

“Even though interest rates are falling somewhat, in many markets outside Melbourne and Sydney the supply of homes for sale has not been as high as historically, meaning conditions have remained quite competitive.”

The new supply cannot keep up with demand either. KPMG forecasts show that Australia’s net housing supply (new completions minus demolitions) will remain approximately 30% below the National Housing Accord target over the next two years.

Ms Conisbee said even if higher interest rates lead to fewer buyers, the market is still characterized by tight supply.

“As a result, any slowdown due to higher interest rates is likely to represent a moderation in price growth rather than a sharp decline,” she said.

Where interest rate increases will bite the most

Traditionally, buyer activity picks up in February after a slowdown during the holiday season of December and January.

Extended government support for first home buyers in the second half of 2025 has helped boost demand in more affordable markets, with investors now accounting for the highest share of new lending since 2017.

The higher end of the real estate market could take the biggest hit as government incentives support buyers in affordable markets. Photo: Getty

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Ms Flaherty said the top end of the property market would likely take a bigger hit from a rate hike.

“Often we see a bigger impact at the top end of the market with higher interest rates, which makes sense because the bigger your mortgage, the bigger the dollar impact of a rate increase,” she said.

“And when we look at the schemes that are in place and the types of buyers that are active, it’s more first home buyers, more investors; it’s less likely to be the type of buyers who are competing at the higher end.”

Average house prices in the combined capitals now exceed $1 million, while a typical detached house in Sydney now costs more than $1.6 million.

Brisbane ($1.2 million), Perth ($1.05 million), Canberra ($1.01 million) and Melbourne ($1 million) have also reached the million-dollar median house price club.

Higher property prices are forcing borrowers to move on, with the average new home loan now at a record high according to the Australian Bureau of Statistics.

As of September, the average new loan for an owner-occupier nationally was $694,000.

Recent homebuyers who have not yet built up an equity buffer will bear the brunt of the coming rate hike. Mortgage Choice calculations show that a 25 basis point increase will add almost $1,000 to the annual cost of a $500,000 mortgage, and double that for those with an outstanding mortgage amount of $1 million.

Dollar hit from one interest rate increase:

If the RBA were to implement a second rate hike, borrowers with a $500,000 loan would have to pay off another $1,900 in total interest in a year, and more than $3,800 on a $1 million mortgage.

The consensus among economists at the four major banks is for a 25 basis point interest rate increase in February, but after that opinions are more mixed.

Big four interest rate forecasts for banks:

ANZ, CBA and Westpac all expect the RBA to adopt a one-off approach in 2026.

NAB expects two rate hikes in February and May, with rates remaining at an “extended pause” of 4.1% for the rest of the year. NAB has planned two rate cuts in the second half of 2027 as the impact of higher interest rates ripples through the economy and pushes inflation back to target.