Will rising interest rates cause Aussie property prices to fall?

Beachside houses in Sydney.

In light of the Reserve Bank’s aggressive unwinding of its pandemic-era policy settings, economists at Commonwealth Bank have tipped a major drop in property prices, with falls as large as 18 per cent expected in the major east coast markets.

CBA now predicts Sydney dwelling prices will decline by 11 per cent this year and a further 7 per cent in 2023. Melbourne prices are expected to fall at a similar rate — 10 per cent in 2022 and 8 per cent in 2023.

It has also forecast 6 per cent growth in Brisbane this year before the Queensland capital takes a turn for the worse in 2023 with a 10 per cent dip.

As recently as March, CBA economists had pencilled in price drops of just 3 per cent this year and 9 per cent in 2023 in both Sydney and Melbourne. But the RBA’s recent about-face on rates prompted a rethink from the major bank. 

“There has been a clear shift in tone and stance from the Board and we now expect the RBA to front load rate hikes,” said CBA head of Australian economics Gareth Aird.

After raising interest rates by 0.25 per cent in May, the RBA kicked things into high gear this month with a bumper 50 basis point hike. The decision comes as global supply-side problems continue to run up inflation beyond normal levels. 

Reserve Bank of Australia cash rate

 

“Home prices will move lower from here given the RBA is expected to tighten policy via rate hikes quickly. The extent to which prices contract will depend in large part on the speed and magnitude at which the RBA lifts the cash rate,” Aird said.

Aird expects the RBA to once again raise rates by half a percentage point in July, before settling on hikes of 0.25 per cent in August, September and November. 

That would leave the cash rate sitting at 2.1 per cent by the end of the year — much higher than CBA’s initial forecast of 1.6 per cent and a level which it describes as “contractionary.”

Faced with higher borrowing costs, many hopeful buyers will turn their attention to cheaper properties, if not stop looking altogether. New entrants to the property market will also face extra hurdles in the form of higher debt-to-income (DTI) ratio requirements by lenders. 

In its latest policy statement, the RBA acknowledged that housing values had already begun declining in certain markets, but remained “more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending.”

But the economy may be on shakier footing than many care to admit. According to Aird, the coming slowdown in economic growth will likely force the RBA to reverse course and begin cutting interest rates next year.

“With the RBA now expected to take the cash rate to a contractionary setting, we have pencilled in rate cuts for the second half of 2023,” he said.

For more information on property and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.

Home loan comparisons on Mozo - last updated 4 March 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Mozo Expert Choice Badge
    Home Fixed Rate

    Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    5.80% p.a.
    fixed 3 years
    5.91% p.a.

    Enjoy the security of a competitive fixed interest rate from Up. No application, monthly, annual, redraw, or discharge fees to pay. Up to 50 free offset accounts available. Up home loans are only available to owner-occupiers buying or refinancing in major Australian cities. Up is 100% owned by Bendigo Bank. New joiners get $10 by signing up to the app using code UPHOMEMOZO. (T&Cs apply). Mozo Experts Choice award winner.

    Compare
    Details
  • Straight Up

    Obliterate, Owner Occupier, Principal & Interest, <50% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.24% p.a. variable
    6.24% p.a.

    Get a low variable rate depending on your deposit with Athena’s Straight Up Variable Home Loan. AcceleRATES feature helps you to reduce your home loan even faster (T&Cs apply). Zero fees to pay. Free redraw facility. Handy mobile app to manage your home loan.

    Compare
    Details
  • Offset Home Loan

    Package, Owner Occupier, LVR<60%, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    6.15% p.a. variable
    6.40% p.a.

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

    Compare
    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.