Australia’s property market could see renewed upward pressure if the Reserve Bank of Australia (RBA) lowers interest rates this week, according to new forecasts from the Commonwealth Bank of Australia (CBA). Analysts suggest even modest reductions could fuel price growth in an already strained housing market.
The RBA’s board meets on Monday and Tuesday to set the cash rate, with economists widely anticipating a 25 basis point cut. CBA’s chief economist Luke Yeaman and associate economist Lucinda Jerogin forecast national home prices to rise faster this year than previously expected, should the cut occur. They warn, however, that affordability will remain a significant challenge despite potential relief in financing costs.
Interest Rates as a Key Driver of Housing Prices
According to CBA’s updated projections, interest rates remain the most significant short-term driver of property values, particularly in a market with limited housing supply. The bank’s modelling suggests that a total reduction of 100 basis points could lift national dwelling prices by around 9 per cent, as measured by the Cotality National Hedonic Home Value Index.
So far in 2025, the RBA has reduced rates by 50 basis points, and cuts of 25 basis points in both August and November would meet that threshold. Yeaman and Jerogin noted that further reductions in early 2026 could push the projected price impact to 11.5 per cent.
Price growth is not expected to be uniform across the country. In 2025, Darwin is forecast to see the strongest increase at 13 per cent, followed by Brisbane at 8 per cent, Perth at 7 per cent, and Adelaide and Canberra at 6 per cent. According to CBA, this reflects current market momentum, strong household incomes and a relatively resilient labour market.
Long-Term Affordability Pressures Remain
While near-term price gains may be driven by monetary policy, structural challenges continue to weigh on housing affordability. According to the National Housing Supply and Affordability Council, underlying demand is still set to exceed supply in 2025 and 2026, though the gap is narrowing due to easing population growth and a modest recovery in construction activity.
CBA’s economists point to a rising “household size” as a sign of economic pressure, with more Australians sharing homes due to high rents and living costs. They estimate that affordability peaked in November 2024, measured by the percentage of income a dual full-time household spends on mortgage repayments. While this is expected to improve slightly over the next two years, it remains stretched compared to historical levels.
Since 1990, real home prices have increased by an average of 3.3 per cent annually, outpacing the 2.9 per cent growth in real household disposable incomes. According to CBA, this long-term imbalance has contributed to Australia ranking among the least affordable housing markets globally, with Sydney and Melbourne among the most expensive cities worldwide.
