RBA rate rise deepens Australia's housing market slowdown

Cotality said the Reserve Bank of Australia's latest cash rate increase will deepen the housing market slowdown, keeping demand and turnover subdued.

The cumulative effect of four rate rises since February has cut borrowing capacity by almost AUD $90,000 for a household on a median income, equal to about a 9% drop in purchasing power. The reduction comes as higher mortgage costs add to broader cost-of-living pressures and test borrowers with large debt burdens.

Cotality's national Home Value Index peaked in March, one month after the current tightening cycle began. Since then, home values have fallen as buyers' access to credit has narrowed, affordability has worsened, and tax policy changes have weighed on some parts of the market.

The Reserve Bank's decision to raise the cash rate by 25 basis points had been widely expected. Inflation remains too high, recent readings have been stronger than the central bank anticipated, and labour market conditions, while easing, remain tight by historical standards, Cotality said.

Borrowing squeeze

At the centre of the housing slowdown is a steady loss of borrowing power. Rising mortgage rates have progressively reduced the amount buyers can borrow, weakening housing demand at a time when consumer sentiment remains deeply pessimistic.

The group pointed to household finance ratios for the June quarter showing housing debt at 134.9% of household disposable income. That level underlines how exposed many households remain to further interest rate increases relative to their incomes.

Higher repayments are likely to flow quickly through to mortgage holders, particularly borrowers who took on debt when rates were lower. For prospective buyers, stricter serviceability tests and more expensive finance are likely to limit the range of properties they can consider, adding further pressure to transaction volumes.

Another increase would weaken housing conditions further by cutting borrowing capacity again and hurting loan serviceability and sentiment. Housing turnover is likely to remain below average as both buyers and sellers adapt to a prolonged period of higher borrowing costs.

Recovery outlook

Attention will now turn to whether the latest increase marks the peak of the cycle and how long monetary policy stays restrictive. In Cotality's view, even if rates have reached their high point, housing markets are unlikely to regain meaningful support until borrowers are more confident rates have stabilised and will eventually begin to fall.

That suggests any recovery is likely to be delayed rather than immediate. While weaker demand and falling borrowing power point to further value declines and soft turnover, supply constraints may limit how far prices fall in some areas.

The backdrop reflects the Reserve Bank's broader effort to keep aggregate demand subdued long enough to ease capacity pressures and return inflation to target. In housing, that means the burden of tighter monetary policy is likely to continue showing up in weaker affordability, slower sales, and softer prices.

Recent employment gains and persistently high participation rates, which Cotality cited as signs labour market conditions are easing only gradually, also complicate the picture for borrowers hoping for relief. As long as unemployment remains low by historical standards and inflation stays above target, the case for a quick policy reversal appears limited.

For the housing market, the consequence is a period in which confidence matters almost as much as the rate setting itself. A meaningful recovery is unlikely until borrowers believe interest rates have peaked and an easing cycle is approaching.