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.

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