Interest rates held steady this month, however experts say continued higher interest rates remain a risk to Australia’s property market. 

The Reserve Bank of Australia kept the cash rate at 4.1% in July following a rapid series of cash rate hikes to tackle stubbornly-high inflation since May last year. 

RBA Governor Philip Lowe said the central bank was assessing the state of the economy, with the monthly inflation rate falling 1.2% to 5.6% in May. 

However, Lowe said some further tightening of monetary policy could be necessary to cut inflation to the RBA’s 2–3% target range, citing household consumption as a significant source of uncertainty.  

CoreLogic Research Director Tim Lawless said housing activity could be further impacted if credit became less available. 

“The combination of high cost of living pressures, negative real income growth and the high cost of debt have made it hard for borrowers to obtain credit approval, especially with lenders less willing to lend on high debt-to-income ratios, high loan-to-income ratios or on smaller deposits,” Lawless said.  

“Renewed growth in housing values is another factor weighing on RBA decisions. While the RBA has been clear it doesn’t target asset prices, there is a risk that higher housing prices could keep inflation higher for longer as homeowners feel wealthier and more willing to spend.  

“Despite rates holding firm in July, we could see some a further dampening of the recent exuberance seen across housing markets, where values have generally been rising since March. CoreLogic’s Home Value Index for June showed a subtle easing in the rate of growth nationally, from 1.2% in May to 1.1% in June, which could be the first signs of some heat leaving the recovery trend. 

“Despite the high interest rate environment, the housing sector is still facing an under supply which is likely to provide some support for values. Low supply in the face of record net overseas migration and extremely tight rental conditions should be a key factor helping to offset the impact of higher interest rates.” 

PropTrack Senior Economist Paul Ryan said the housing market had shown remarkable resilience to sharply higher interest rates so far.  

“Despite rates now at levels not seen since 2012, home prices increased further in June, and are up 2.3% over 2023 so far. Offsetting higher mortgage rates, strong buyer demand has been focused on a slower flow of new property listings and led to price increases,” Ryan said.  

“Forward indicators point to further home price growth in the months ahead. But continued higher interest rates remain a risk for the housing market. At some point, eroded borrowing capacities and weaker economic conditions brought about by higher interest rates may lead to price falls, as seen in 2022.” 

Canstar analysis showed borrowers with a $500,000 loan were already paying an extra $1,217 in monthly repayments since the Reserve Bank started lifting rates in May last year, taking them to $3,320 per month. This represented an extra $14,604 per year or 58%. 

Canstar finance expert Steve Mickenbecker said buyers who jumped into the market borrowing up to their limit in the leadup to the first Reserve Bank rate increase in May last year would be feeling the pain. 

“Two more rate increases will see repayments absorbing around 45% of borrowers’ before-tax income, well and truly at stress levels,” Mickenbecker said.