Last week, the RBA hiked interest rates for the fifth time this year, taking the official cash rate to an 18-year high of 4.85%.
The increase was another brutal blow for Australian mortgage holders, who were already facing the highest mortgage rates in the advanced world before the back-to-back 25 bp hikes delivered by the RBA in September and November.
Chart from Justin Fabo (Antipodean Macro)
Following last week’s rate hike, mortgage holders will have seen repayments on the average $736,000 loan increase by around $600 a month since the first increase in February, or by more than $7,000 a year.
Average mortgage repayments as a share of household disposable income will rise to around 37%, roughly the same as in 1989 when mortgage rates were 17%:
The surge in interest rates alongside the federal government’s changes to negative gearing and capital gains tax, announced in the May budget, has also driven the biggest and sharpest downturn in home prices in more than 40 years.
According to Cotality, home prices across the five major capital cities have declined by 8.6% from their early April peak, marking the equal biggest decline in more than 40 years.
Sydney has led the decline, with prices falling by 10.5% so far, followed by Perth (-9.5%) and Brisbane (-8.4%).
Over the past quarter alone, values have fallen by 4.7% across the five major capital cities, led by Perth and Brisbane, both down 5.9%.
At the current rate of decline, we are looking at a 10% drop across the five major capitals by Christmas.
The price correction is also likely to extend well into 2027, given that the RBA has just hiked again, for-sale listings are piling up, the budget’s changes to negative gearing and CGT are still working their way through, and unemployment is forecast to rise above 5% next year.
Cotality – Change in for-sale listings
Indeed, after last week’s rate hike was delivered, CBA and AMP both downgraded their forecasts for dwelling prices, and both now expect a 15% decline in values across the major capitals:
CBA’s house price forecast
AMP’s house price forecast
CBA tips Sydney to fall by 16%, while Brisbane and Perth will both fall by 18% from their peak.
AMP chief economist, Shane Oliver, declared that the 30-year housing supercycle was over amid “the perfect storm now hitting the property market”, including structurally higher interest rates, the removal of negative gearing and CGT concessions, record poor affordability, and likely lower levels of immigration.
The auction market illustrates this weakness, with a final clearance rate below 50% reported in 22 of the past 24 weeks.
The cohort most exposed to the rise in interest rates and the sharp decline in home values are recent first home buyers, who purchased using the government’s 5% deposit scheme.
FHBs utilising the 5% deposit scheme since 1 October 2025
Many are facing the prospect of extreme mortgage stress and negative equity, where their homes will be worth less than their mortgages.
