RBA rate hike looms: How Tuesday’s decision could hit property prices

The property market’s strong momentum is about to be tested as an imminent interest rate hike dents buyer confidence and lowers borrowing power.

The Reserve Bank of Australia is widely expected to raise the cash rate for the first time in more than two years when it meets on Tuesday, in an attempt to get high inflation back within target.

That could push prospective buyers to the sidelines as they watch-and-wait the RBA’s next move, with the memory of the previous hiking cycle – and the ensuing market correction – still fresh in the nation's psyche.

PropTrack senior economist Anne Flahery said with headline inflation up 3.8% over the past 12 months and well above the RBA’s 2-3% target range, the consensus for a February rate hike has firmed. Trimmed mean inflation, which smooths out the impact of volatile, one-off price movements also sits above target.

“Even though we are expecting an interest rate rise off the back of the latest inflation data, I think that it is still going to be a shock for a lot of people, especially given last year it looked like we'd come to the end of the era of the previous rate height cycle,” Ms Flaherty said.

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

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

Ray White chief economist Nerida Conisbee said continued momentum leading into 2026 suggests higher rate expectations aren’t yet priced into the market.

“Price growth remained broad-based over summer, suggesting buyers continued to transact as though borrowing costs would remain unchanged,” Ms Conisbee said.

“This is a clear contrast to the start of last year, when expectations of rate cuts began influencing behaviour as early as January, well before the first reduction was delivered in February.”

Aussie households are bracing for higher home loan repayments ahead of an expected rate hike in February. Picture: Getty

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

“While prices have held firm so far, this does not mean higher rates would have no impact if delivered,” Ms Conisbee said.

“A rate rise would be expected to slow activity, particularly in more interest-rate-sensitive markets.”

Australia’s median home value rose 0.2% in January to $883,000 according to the latest PropTrack Home Price Index, marking the 13th consecutive month of growth and pushing property prices to a new record high.

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 0.1% increase and Darwin was flat.

Ms Flaherty said even with an interest rate rise this week, property prices would likely continue rising throughout 2026, though current forecasts of between 6-8% price growth nationally could be revised lower if the RBA was forced to move again.

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

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

“It all comes down to the fact that we have a multi-speed market at the moment. Some capital cities still have severe housing shortages and insufficient homes being listed for sale relative to demand,” she said.

Home price growth forecasts:

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

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

Over the past year, just one location in the top ten performing markets in the country was located outside of WA and Queensland, with Perth and Brisbane’s more affordable outer fringe regions dominating the list.

“The rate of price growth in 2026 is going to come down to how much buyer demand is out there,” Ms Flaherty said.

“Even if interest rates do dent that slightly, in a lot of markets outside of Melbourne and Sydney the supply of homes for sale hasn't been as high as it has been historically, which has kept conditions pretty competitive.”

New supply is also failing to keep up with demand. KPMG forecasts show Australia’s net housing supply (new completions minus demolitions) over the next two years will fall short of the National Housing Accord target by roughly 30%.

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

“As a result, any slowing driven by higher rates is more likely to appear as a moderation in price growth rather than a sharp fall,” she said.

Where rate hikes will bite most

Traditionally, buyer activity picks up again in February following a slow down over the December and January holiday period.

Expanded government support for first-home buyers in the latter part of 2025 has helped fuel demand in more affordable markets, while investors now make up the highest share of new lending since 2017.

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

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

“Often we see a larger impact at the higher end of the market with higher interest rates, which does make sense, because the larger your mortgage, the bigger the dollar impact of an interest rate rise,” she said.

“And if we look at the schemes out there and the types of buyers that are active, it’s more first-home buyers, more investors; they're less likely to be the kinds of buyers that are competing at that high end.”

Median house prices across the combined capital cities now exceed $1 million, with a typical freestanding home in Sydney now costing more than $1.6 million.

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

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Higher property prices are pushing borrowers to stretch themselves further, with the average new home loan now sitting at a record high according to the Australian Bureau of Statistics.

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

Recent homebuyers who’ve yet to build up an equity buffer will bear the brunt of the upcoming rate hike, with Mortgage Choice calculations revealing one 25 basis point increase will add almost $1,000 to the annual cost of a $500,000 mortgage, and double that for those with $1 million outstanding on their home loan.

Dollar hit of one interest rate hike:

If the RBA were to deliver a second rate hike, borrowers with a $500,000 loan would be forking out an additional $1,900 in total interest over a year, and more than $3,800 on a $1 million mortgage.

The consensus between economists at the big four banks is for a 25 basis point rate hike in February, beyond that the view is more mixed.

Big four bank interest rate forecasts:

ANZ, CBA and Westpac all expect the RBA will take a one-and-done approach throughout 2026.

NAB expects two rate hikes in February and May, with rates to remain on an “extended pause” at 4.1% for the rest of the year. In the back half of 2027, NAB has pencilled in two rate cuts as the impact of higher interest rates flow through the economy and drive inflation back down to target.