Rate rise hits housing affordability, Chalmers says inflation lower than when government took office

Australia’s housing affordability pressures are set to deepen after the Reserve Bank lifted the cash rate by 25 basis points to 4.35 per cent, adding to borrowing costs as early signs point to softening property prices across major cities.

The decision, taken in an 8–1 vote by the central bank’s Monetary Policy Board, comes against a backdrop of rising inflation risks tied to global instability, with policymakers signalling that further increases remain possible.

Treasurer Jim Chalmers said households were already under strain from international events. “Australians are already paying a hefty price for the war in the Middle East and this decision will make it tougher,” he said. “It will add to the pressure that families and businesses are under at a time of ongoing global instability.”

The Reserve Bank pointed to inflation pressures linked to fuel and global supply shocks. “The RBA’s Statement is clear that conflict in the Middle East is already adding to inflation,” Chalmers said.

Although widely expected, the increase compounds affordability challenges for borrowers and first-home buyers. “While this decision was widely expected and widely anticipated, that doesn’t make it any easier,” he said.

Higher rates are already feeding into housing costs. For an average borrower with a $600,000 mortgage, repayments have risen by more than $270 a month since February following three consecutive hikes.

Market indicators suggest a shift may already be underway in property prices. Economist Stephen Koukoulas said recent data shows a broad-based easing in asking prices. “House prices are heading for a fall – SQM Research is showing vendor asking prices are down,” he said. “In the last week, asking prices for dwellings were down in Sydney, Melbourne, Brisbane, Adelaide, Perth & Canberra – they were only up in Darwin and Hobart.”

Even with signs of cooling, affordability remains stretched. Financial commentator Alan Kohler said the longer-term imbalance between prices and incomes is unlikely to unwind quickly. “My optimism is simply focused on it not getting any worse,” he said. “I very much doubt that house prices will go back to where they were in relation to incomes. When they started rising in 2000, house prices were about four times average incomes. And now they’re nine times roughly, maybe ten, depending where you are.”

“I think that the proportion of people who have to rent for their entire lives will increase. And that’s not so bad. I mean, it’s not the end of the world. A lot of people in Europe and everywhere, they rent all the time”

Kohler said the shift could reshape how Australians access housing. “I think that the proportion of people who have to rent for their entire lives will increase. And that’s not so bad. I mean, it’s not the end of the world. A lot of people in Europe and everywhere, they rent all the time.”

The Reserve Bank’s updated forecasts point to persistent inflation, with headline inflation at 4.6 per cent over the year to March and expected to rise further in the near term. Governor Michele Bullock said the Board was focused on keeping expectations anchored. “We have already seen expectations for inflation over the next year or so increase, and we need to ensure that this does not lead to higher inflation expectations over the longer term,” she said.

Economic growth is expected to slow, with forecasts indicating expansion of around 1.3 per cent by the end of 2026 and a potential rise in unemployment if conditions weaken.

The government says it is attempting to ease cost pressures through targeted measures. “We understand that people are under pressure which is why we’re rolling out responsible cost of living relief including temporary cuts to the fuel excise and heavy road user charge, cheaper medicines and more bulk billed doctor visits, two more rounds of tax cuts and a $1000 instant tax deduction,” Chalmers said.

Fuel costs have been a key driver of recent inflation. “Since we halved the fuel excise, we’ve seen petrol and diesel prices fall by at least 70 cents in most capital cities,” he said.

Chalmers said inflation had eased from earlier highs, though risks remain. “When we came to office, inflation was north of six per cent and rapidly rising, it’s now much lower than that. Underlying inflation was almost five per cent, it’s now also much lower,” he said.

The broader outlook remains uncertain. “The duration and severity of the conflict will determine how much more pressure it adds to global inflation and how much it is a hit to growth,” he said, noting the central bank had identified “materially heightened uncertainties” in the economic outlook.

The government has flagged fiscal discipline as a priority ahead of the next Budget. “The uncertainty and volatility in the global economy mean there is an even greater premium on responsible fiscal management,” Chalmers said. “In the upcoming Budget, we’ll continue that record of responsible economic management by saving more than we spend and banking all upward revisions to revenue.”

He added that Australia remained relatively well placed despite global headwinds. “The Australian economy is not immune from extreme global volatility, but we are well placed and well prepared with faster growth at the end of last year than any major advanced economy, low unemployment and solid wages growth.”

The Reserve Bank indicated it would continue to monitor inflation, employment and global developments closely, leaving open the prospect of further rate changes as housing affordability pressures and broader economic conditions evolve.