The recent interest rate rise is putting new pressure on greater housing affordability, the Real Estate Institute of Australia (REIA) says.
On Tuesday, the Reserve Bank of Australia (RBA) board unanimously chose to raise the official cash rate to 3.85% in response to higher-than-expected inflation data.
REIA President Jacob Caine said the decision risks undoing the housing affordability improvements achieved over the past year.
“The affordability improvements recorded last year were largely driven by interest rate cuts,” Caine says.
“REIA data shows housing affordability improved for three consecutive quarters in 2025 as average loan repayments account for 47% of median family income, an improvement of 1.6 percentage points over the past year.”
He says that progress “risks being reversed as borrowing costs rise”.
“This rate increase threatens to halt that positive momentum and will place renewed pressure on buyers and mortgage holders.”
Caine says that while the RBA uses monetary policy to manage inflation, housing cost pressures are a supply issue.
“Housing inflation remains persistent because Australia does not have enough homes,” he says.
“Chronic supply shortages drive higher prices, higher inflation and, ultimately, higher interest rates – worsening affordability.”
“Addressing planning bottlenecks, accelerating new supply and supporting social and affordable housing must remain the priority if we are serious about easing long-term housing and inflation pressures.”
WHY THE INTEREST RATE WENT UP
At its meeting on Tuesday, the RBA board noted in a statement that inflation had picked up in the second half of 2025.
It noted that a wide range of data over recent months confirmed that inflationary pressures picked up materially in the second half of 2025.
“While part of the pick-up in inflation reflects temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight,” the RBA statement says.
“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target (by 0.25%).”
BUSINESS COUNCIL REACTS
The Business Council of Australia says the decision means there must be a renewed focus on boosting productivity and a 2% cap on government spending.
Council chief executive Bran Black says there is now an urgent need to reduce inflation pressures.
“(The) rate rise is a clear reminder that inflationary pressures are still with us and that the job of getting it under control isn’t finished,” he says.
“That’s why the upcoming budget must focus on disciplined spending and put new fiscal rules in place to ensure spending does not keep increasing as is currently forecast.
“A cap on real spending growth of 2% a year can help to keep a check on spending while still providing flexibility to accommodate decisions about spending per person after inflation,” Black says.
He says the decision highlights the need for a broader economic response with the RBA lowering the outlook for productivity and real wages growth.
“If we can lift productivity and unlock private sector investment, we can sustainably grow wages and improve living standards without adding to inflation,” he claims.
