Uncertainty over just how far interest rates might rise is making homebuyers nervous, with real estate agencies reporting the property market’s strong momentum is already being tested.
The Reserve Bank of Australia raised the cash rate for a second consecutive month in March, and economists are predicting a third hike when the central bank next meets in early May.
That would completely undo the three cuts delivered last year, wiping tens of thousands of dollars off an average person’s borrowing power and raising mortgage repayments for those already saddled with debt.
REA Group executive manager of economics Angus Moore said home price growth will likely slow as a result.
“The fact that rates have increased sooner than expected, and further hikes look likely, will slow the pace of home price growth as borrowing capacities decline,” Mr Moore said.
“We haven't seen a huge effect to date - home prices were still up solidly in February - but we'll have to see how March's hike flows through the rest of March and into April.”
The latest PropTrack Home Price Index shows national home values rose 0.5% in February to sit 9.1% higher than a year earlier.
It’s the fastest annual pace of growth since mid 2022 when interest rates had just begun rising from a record low of 0.1%, before the national housing market declined for ten consecutive months.
While the size and speed of rate increases this cycle is expected to be much lower than in 2022 and 2023 – when the RBA hiked 13 times in just 18 months – worsening affordability means many buyers are more sensitive to rate hikes than they were at the start of the previous hiking cycle.
Economists at all of the big four banks have already moved to downgrade their property price forecasts for 2026 and 2027 on the back of the February rate hike, and expect at least one more increase in May.
Mr Moore said his property price forecasts of between 6-8% nationally over 2026 will also likely be revised lower.
“The outlook for rates is a quite a bit higher, with inflation having come in stronger than expected. All else equal, that will slow price growth.”
Property price growth is expected to slow as rising interest rates hit buyers' borrowing power. Picture: Getty
The flow-through effect of higher interest rates will take time, but real estate agencies are already reporting increased buyer caution – particularly in markets where supply and demand is more evenly balanced.
Ray White chief economist Nerida Conisbee said foot traffic at open homes has been on a downward trend for several weeks, and fewer buyers are competing at auctions. At the same time, the group reported an increase in auction volumes.
“With more homes coming to market and fewer buyers actively competing, overall conditions have become more challenging,” Ms Conisbee said.
She said the coming weeks will be important in determining whether this represents a temporary pause, or the beginning of a more sustained cooling in activity.
Lack of supply drives booming states
Regardless of where interest rates move, PropTrack senior economist Anne Flaherty said a lack of supply would continue to support price growth in certain markets across the country.
“In particular markets like Brisbane and Perth, where price growth has been very strong, those are markets that have actually seen a pretty significant decline in recent years in the total number of homes for sale,” she said.
Brisbane is now the second most expensive capital city property market in the country. Picture: realestate.com.au
PropTrack data shows home prices in Perth have risen 19.5% over the past 12 months to a median of $987,000, with Darwin (+16.2%), Brisbane (+15.9%) and Adelaide (+14.8%) also soaring as stock levels dwindle.
"The number of active listings in Brisbane, Perth and Adelaide is down around 45% from pre-pandemic levels," Ms Flaherty said.
"The limited supply of homes for sale has likely been supporting home price growth in these cities, and may see them grow at a stronger pace relative to other capitals in 2026."
But in markets like Sydney and Melbourne, she said property price growth had already slowed towards the end of 2025 as the volume of property listings surged.
“In contrast to a lot of other places in the country, there were a lot of homes for sale, and that meant that conditions were not as competitive for buyers.”
Acting chief executive of Sydney real estate agency BresicWhitney, Will Gosse, said the RBA's decision to raise rates again will “deepen a slowdown that was already underway”.
“Sales volumes are tracking lower than this time last year, transactions are taking more care and patience to bring together, and the risk is that this caution extends through Easter and into the back half of autumn, typically one of the most active periods for buying and selling,” Mr Gosse said.
Ray White WA chief executive Mark Whiteman said buyers still outnumbered sellers in the west, which would continue to support price growth.
“We've had a very small increase in properties since Christmas, but no where near enough to quench the demand from buyers.”
Of the top ten regions for price growth across the country, six were located in Western Australia, led by the city of Mandurah, which has seen home values jump 22.2% over the past 12 months.
Despite this, worsening affordability is expected to lead to a rapid pullback in the pace of price growth across even the hottest capital cities of Perth and Brisbane.
Recent forecasts by economists at the Commonwealth Bank predict annual price growth in Perth and Brisbane slowing to about 4% by the end of 2027.
“The mid-sized capital cities are forecast to continue to outperform Sydney and Melbourne this year, with the gap most pronounced in Perth and Brisbane,” CBA senior economist Trent Saunders said.
“The question is how long can this strong growth last? Based on our forecasts, not much beyond 2026.
"As higher interest rates take hold, housing construction picks up, population slows, and affordability constraints become more binding, price growth in Brisbane and Perth is expected to slow."
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New analysis from Canstar shows an average full-time worker will be able to borrow about $25,000 less as a result of the two rate hikes delivered in February and March, while a typical couple will see their combined borrowing power slashed by almost $50,000.
If a third hike is delivered in May as expected, that could wipe a total of $37,000 off that same person’s borrowing capacity, and $73,000 for a couple.
Canstar’s data insights director Sally Tindall said for many buyers, each rate hike can mean the difference between getting into the market or missing out altogether.
“Every rate hike doesn’t just hit borrowers in the hip pocket, it also quietly chips away at how much they can borrow,” she said.
These calculations assume a person earning the average full-time wage of $106,950 with no other debts, no dependents and minimum expenses.
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