By Property News Desk
The Reserve Bank of Australia (RBA) has officially ended the nation’s brief reprieve from monetary tightening, lifting the official cash rate to 3.85% at its first meeting of 2026. This decision, up from 3.6%, marks a definitive reversal following the short-lived rate-cutting cycle that characterized much of 2025. While the move aims to curb a resurgence in inflation, data from property analytics firm Cotality suggests the housing market’s underlying momentum is unlikely to be easily halted.
The RBA’s hand was forced by a “surprise tightening” in the labor market, with unemployment dipping to 4.1% in December, alongside an inflation overshoot where the trimmed mean rose by 3.3% year-on-year. Housing costs themselves played a significant role in this sticky inflation, with the cost of new home builds and rising rents adding to cost-of-living pressures.
A Resilient Housing Sector
Despite the return to tightening, the fundamentals of the Australian property market remain robust. Since the RBA began cutting rates in February 2025, Cotality’s Home Value Index has surged by 9.0% nationally, adding approximately $75,000 to the median dwelling value. This growth was fueled by increased borrowing capacity and lower lending rates, creating a demand surge that has consistently outstripped available supply.
Even in January, traditionally a quiet month, home values rose by 0.8%, with the strongest growth recorded in more affordable, lower-quartile properties. This momentum suggests that while interest rates are a powerful lever, they are currently secondary to the acute shortage of housing stock.
The Borrowing Power Hit
The immediate impact of the hike will be felt in serviceability. For an average new mortgage of $700,000, the rate rise will add approximately $110 per month to repayments. Perhaps more significant is the reduction in borrowing power; a median-income household stands to lose around $18,000 from their maximum mortgage limit.
Cotality analysts predict this will displace demand rather than destroy it. As borrowing power shrinks, buyers are expected to migrate from mid-tier properties to lower-quartile options, increasing competition in urban fringes and regional markets near capital cities.
Supply Constraints: The Safety Net
Looking ahead, the market faces a tug-of-war between headwinds and tailwinds. While affordability pressures and slower population growth may temper demand, the supply side remains critically constrained. Construction costs, labor shortages, and listing volumes that remain “well below trend” are effectively putting a floor under property prices.
As for the future of the cash rate, the outlook is clouded. While futures markets are pricing in two hikes for 2026, three of the big four banks view this recent move as “one and done,” believing the RBA will now hold for the remainder of the year. Given the supply-demand imbalance, Cotality concludes that a single rate hike is unlikely to substantially alter the current market balance.