Higher Rates, Tight Supply: The 2026 Property Equation

The year is underway, and borrowers have already been confronted with something that was considered entirely unlikely just months ago: an interest rate hike from the Reserve Bank.

The RBA’s decision to increase the cash rate from 3.60 per cent to 3.85 per cent was in response to stubbornly high inflation. Perhaps more significantly, most commentators are factoring in two more increases for 2026. On the surface, interest rate rises dampen property buyer activity, as higher borrowing costs and reduced borrowing power mean less available funds for property acquisition. Combined with considerations such as APRA’s mandated three per cent serviceability buffer, the headwinds for borrowers appear quite significant.

However, a deeper examination suggests this rate-hiking cycle may be considerably less impactful than the 2022/23 experience. When rates began rising in March 2022 from 0.1 per cent, they rose progressively through to the end of 2023, peaking at 4.35 per cent, with those increases representing a larger proportional rise in borrowing costs. From the latest starting figure of 3.60 per cent, a 0.25 per cent increase reflects far less additional repayment pressure than the previous moves.

More importantly, there remains a significant gap between supply and demand in major population centres, with supply constrained in most major centres. The federal government’s Housing Accord target of 1.2 million dwellings over five years from July 2024 is running 25-30 per cent short of its trajectory. Demand for housing remains strong, driven by population growth through natural increase and immigration. Until this imbalance is addressed, property prices will likely remain robust and elevated, particularly for those looking to enter the market. Higher interest rates will flow through to broader sectors – business confidence and cost-of-living pressures among them. Real estate prices, however, remain somewhat insulated from this headwind by the persistent supply-to-demand imbalance.

In addition, strong demand from first homebuyers and investors continues to bolster the lower end of the market. Further interest rate rises and continued cost-of-living challenges are expected to be largely offset in this sector by first homebuyer incentives, resilient employment conditions, and persistent supply constraints, leading to a softer but still positive 2026 compared to 2025.

This month, our residential teams across Australia have delivered detailed forecasts of property market activity in their respective service areas for 2026. Their observations encompass general market performance and the nuanced risks and rewards across suburbs, property types and price points – all invaluable guidance for investors.

For our commercial readers, this month’s industrial sector outlook covers our larger population centres across Australia. The industrial sector has been the standout commercial property performer in recent years, delivering strong returns. But will this momentum carry forward through 2026? Our specialists provide a detailed analysis to answer this important question.
Finally, our rural teams from around Australia deliver their comprehensive yearly outlook across regions and agricultural segments. This annual assessment of primary production performance, balancing the qualitative and quantitative expertise of our professionals, is a unique offering from Herron Todd White.

2026 will bring both challenges and opportunities across property markets and the broader economy. Staying abreast of market conditions to achieve the best outcomes requires guidance from experienced market experts like those at Herron Todd White offices nationwide.