Australia's Housing Slump Deepens as RBA Prepares Another Rate Rise — Analysis

By James Glynn

SYDNEY--The Reserve Bank of Australia's two-day policy meeting, which ends on Tuesday, will be among the most tense in recent memory, given the backdrop of plunging house prices and persistently high inflation that shows few signs of easing.

The RBA's monetary policy board is virtually assured of raising the official cash rate on Tuesday to 4.85%, its highest level in 18 years, while also keeping the door open to a further hike in either December or February.

The interest-rate rise will come amid news that house prices are falling at their fastest pace in more than 40 years as the property market adjusts to higher interest rates and tax changes in May that have sharply altered the appeal of property investment.

A slowdown in the economy is also pushing up unemployment and raising concerns about job security.

For the RBA, the housing market downturn will likely take a backseat it grapples with inflation of more that 4.0% year-on-year, which threatens to move further away from its 2.5% target in the near term.

The interest-rate outlook looks certain to fuel a decline in house prices of around 15% from peak to trough, which will weigh on already deeply depressed consumer and business confidence.

The RBA doesn't target house prices or give them great weight in interest-rates decisions, but it is hard to see how the current plunge won't feature more prominently in the minds of policymakers this week.

Shane Oliver, chief economist at AMP, said Monday he now expects house prices to slump by 15% in the current downturn, compared with an earlier forecast of between 10% and 15%.

The slump in home prices continued in October, with prices down 1.2% from the previous month, according to property research group Cotality. It was the seventh monthly fall in succession.

Capital-city prices fell 1.4%, and previous months' figures were revised to show bigger declines.

Given Australians' longstanding fixation with properly investment, the impact of the drop in the market could be far more damaging than that of earlier downturns, which usually reversed quickly when the RBA started cutting interest rates.

"To prioritize fighting high inflation and hike this week means risking pushing the economy into a recession," said Paul Bloxham, chief economist at HSBC. "On the other hand, to not hike, is to risk inflation expectations becoming unanchored."

"A tough spot," Bloxham added.

Already there are jitters in the labor market, with unemployment creeping higher this year. While the jobless rate remains near historic lows at 4.7%, economic data suggest growth is slowing and firms are starting to cut jobs.

Data earlier Monday showed manufacturing activity in October contracted at its fastest pace since late 2024, with the downturn in the sector prompting firms to lower their employment for a second consecutive month.

Though modest, the pace of job cuts was the fastest in seven months, driven by both resignations and redundancies, the data showed.

Still, the housing market downturn could also help bring down inflation next year, giving the RBA room to start cutting interest rates.

"House prices will likely reach their turning point in the first quarter of 2027," said Matt De Pasquale, senior economist at Judo Bank. "Steeper corrections historically tend to reach a trough more quickly."

Building costs have been a big part of the current rise in core inflation, he added. New dwelling purchase costs make up 7.6% of the consumer price index and carry a weighting of nearly 11% in the trimmed mean measure, which excludes the largest price swings.

With the worst of the monthly price declines likely in the past, building-cost inflation should ease to near zero through 2027, De Pasquale said. If that happens, building costs could begin to pull underlying inflation lower in the coming quarters, he added.

"Given how broad-based price increases have been, the fading of dwelling cost pressures is no silver bullet in the RBA's inflation fight, but it does take a bit of the edge off," he said.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

November 01, 2026 21:50 ET (02:50 GMT)