September 7, 2026 — 5:20am Save You have reached your maximum number of saved items. Remove items from your saved list to add more. AAA Few people can move asset prices with their words quite like those “high priests” of finance who have been granted the power to set interest rates, the central bankers. A
Few people can move asset prices with their words quite like those “high priests” of finance who have been granted the power to set interest rates, the central bankers.
A cryptic remark from a central banker can easily cause sharemarkets to bounce around, especially when the words come from the chair of the US Federal Reserve.
But this is not just something that happens in high finance. Closer to home, central bankers can have a big influence over the biggest asset class in Australia: housing.
Indeed, right now, what happens to the nation’s housing market will be heavily influenced by what happens to interest rates.
If borrowing money becomes cheaper thanks to a rate cut (which is not expected until next year), that could be what eventually stops house prices from falling, for example. Or, more rate rises would surely inflict more property pain. The prospect of rate rises was one reason the Commonwealth Bank last week downgraded its forecast on property prices, tipping peak-to-trough falls of up to 13 per cent.
As Capital Economics put it last week, the outlook for Australia’s housing market “hinges on the RBA.” This makes sense, given interest rates affect how much you can borrow (which is crucial for most home buyers), and the cost of paying the money back.
So, given the RBA’s actions have such a big impact on housing, how does it think about bricks and mortar when it’s setting interest rates?
Should the RBA even take property into account, or should it just focus on its formal mandate of targeting inflation and “full” employment?
The short answer is that the RBA boffins at Martin Place in Sydney should not make the ups and downs of housing their main focus. There’s a reason why central banks around the world generally have a core objective, which is to keep inflation around a target. It keeps things clearer.
RBA governor Michele Bullock said last month housing was not the “main game” for the central bank, which is more focused on inflation and the economy’s capacity.
But although housing may not be the RBA’s main game, it is also too big to ignore, and the current housing slump helps to illustrate a wider economic dilemma facing the bank.
The RBA rate-setting board can’t completely leave property out of the discussion when it sits down to decide whether to move interest rates later this month – because the housing slump is an economic indicator in itself, and it shows rate hikes are already having a real impact in slowing the economy down, as intended.
Latest monthly figures show the national housing market continues to fall, and in recent weeks economists have been publishing increasingly negative forecasts for house prices.
The government’s crackdown on negative gearing and capital gains tax concessions are surely a big reason for this. The policies have prompted many property investors to rethink putting money into property: that was the whole point of the changes.
But interest rates are also part of the picture. In the past week, markets have been putting growing bets on not only a rate rise this month, but possibly another one later this year. Who knows if they are right, but this trend will probably dampen property buyers’ spirits even more.
Will the RBA care about the housing slump when it decides whether to raise rates again?
As house price falls continue, it could make the RBA less likely to raise rates again, because it would see the housing slump as evidence that its harsh economic medicine of rate hikes is working.
However, it’s more likely the RBA would probably see the downturn in housing as helpful to their objectives.
Independent economist Saul Eslake says falling house prices could be helpful in getting inflation down in two ways. First, he says, if falling house prices eventually fed into falling new housing prices, that would help the RBA meet its inflation target. And second, if falling house prices make us feel a bit poorer and spend a bit less, this could also be welcome by the RBA.
When the RBA board members sit down to discuss interest rates later this month, the housing market would have to be a big part of the discussion.
The central bank doesn’t try to set house prices, but it would see house prices as a sign of how the economy’s travelling – and with prices now accelerating fast, it might give members reason to hold rates.
At the same time, however, the markets are betting Bullock’s bigger worry will be inflation, which remains outside the central bank’s 2 to 3 per cent target band.
In the past fortnight, inflation and economic growth figures have been surprisingly strong, and economists are betting that will make rate hikes more likely. But more aggressive rate rises also run the risk of driving the economy into recession.
Economists such as AMP’s Shane Oliver believe that despite that risk, the RBA’s most pressing problem right now is inflation, and Bullock and the board will respond by jacking up interest rates further, rather than waiting for inflation to gradually slow.
“They face a difficult dilemma because they would be worried that if they go too far they would knock the economy into recession,” he says.
The fear is that if the RBA does not act decisively enough to get inflation back in the target, we run the risk of entrenching both high inflation and slow growth (known as stagflation). “They do face a choice between risking recession and risking stagflation,” Oliver says.
As always, the challenge for the RBA is that interest rates are a blunt instrument. They inflict economic pain, and there’s the ever-present risk of going too far and causing a recession. Hopefully, that’s a risk that Bullock and the board can navigate.
But we should not expect them to be less thorough in taming inflation for the sake of house prices. Anyone hoping the RBA will ride to the rescue of the housing market by delivering rate cuts in the short term is likely to be disappointed.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.From our partners
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