Builders say the latest interest rate hike will make building new homes more expensive and slow down the delivery of much-needed housing supply.
The Reserve Bank of Australia raised the cash rate by 25 basis points to 4.1% on Tuesday, as it tries to combat rising inflation locally while also dealing with the impact of increasing oil costs resulting from the conflict in the Middle East.
It’s the second rate hike in as many months, which will come as a hit to many households who had pocketed the savings from the three interest rate cuts handed down last year.
Many mortgage holders will see their repayments rise, but home buyers looking at building a new home will also face higher costs, home building groups say.
Master Builders Australia has warned the rate hike will “hit building and construction extremely hard”, coming on top of surging fuel prices and disrupted supply chains that will increase the cost of construction.
“Today’s rate hike makes investment in new housing less attractive, adds more financing pressure, especially on high density projects, and makes the National Housing Accord target harder to reach,” Master Builders Australia chief executive Denita Wawn said.
“Builders around the country have been getting hit with fuel and product surcharges as a result of the Middle East conflict, with cost increases on inputs including transport and concrete.”
Home builders fear the latest interest rate hike will slow home building activity. Picture: Getty
Ms Wawn said supply chains had also been disrupted for materials such as tiles and plastic, which would further delay the supply of new homes.
Higher prices and disrupted supply chains can threaten the viability of building companies due to the common practice of fixed price contract arrangements, which was seen in the years since the pandemic started when building company insolvencies spiked.
The average cost to build a house in Australia was $443,422 as of December 2024, according to the most recent Australian Bureau of Statistics data, however the final cost depends on location, size and other factors.
Master Builders estimated that the cost of building a new house was 47% more expensive than it was just before the pandemic.
Master Builders Australia chief executive Denita Wawn says the rate hike will make investment in new housing less attractive. Picture: Supplied
Home building activity has been improving, but there are fears that the latest interest rate hike and other factors will dampen momentum going forward.
There were 14,564 home building approvals in the month of January, down 15.7% compared to the same time last year, according to the latest ABS figures.
However, a longer-term view of the data reveals home building approval activity has been improving, with realestate.com.au analysis showing home building approvals were 9.2% higher during the year to January, compared to the previous 12 months.
The number of new homes commencing construction rose 6.6% during the September 2025 quarter, and was 11.6% higher than the same time the previous year.
Tim Reardon, chief economist at the Housing Industry Association, said higher interest rates increased the cost of delivering new homes and made it more difficult to finance new housing projects.
Housing Industry Association chief economist Tim Reardon says governments will need to do more to boost the supply of new homes. Picture: Tertius Pickard.
“As a result, this decision is likely to reduce the number of new homes commencing construction at precisely the time Australia needs more housing supply,” he said.
“When fewer homes are built, competition for existing housing increases, pushing prices and rents higher and adding to housing inflation.”
Mr Reardon said governments needed to do more to increase the supply of new homes if they wanted to improve housing affordability.
Australia’s median home price rose 9.1% to $897,000 during the year to February, adding about $90,000 to the value of the median home, according to the latest PropTrack Home Price Index.
While Australia’s housing shortage will continue to put pressure on home prices, the latest rate hike will also dampen the borrowing capacity for many home buyers.
REA Group senior economist Eleanor Creagh said the rate hike would temper the improvement in borrowing capacity that followed rate cuts in 2025.
“Higher mortgage rates will add to affordability constraints for buyers and will slow the pace of price growth from the strong gains recorded through 2025,” she said.
“National home prices have risen solidly over the past year. However, affordability remains stretched, and further tightening in monetary policy will limit the pace of further price increases through 2026.”
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