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Reserves Bank's Rate Cuts: Impact on Australian Housing Affordability

The Reserve Bank of Australia (RBA) recently made a pivotal decision to cut the official cash rate (OCR) by 0.25%, bringing it down to 3.60%.

This move marks a total reduction of 0.75% from its peak of 4.35%.

Economists and financial markets anticipate further cuts, potentially two more by mid-2026, reflecting a cautious easing policy by the RBA.

Historically, reductions in the OCR tend to stimulate a rise in dwelling values, typically seeing double-digit increases. Yet, Cotality warns these cuts might offer only limited relief, failing to transition monetary policy from restrictive to a truly stimulatory state. Despite the drop, the OCR remains elevated compared to the pre-pandemic average cash rate of 2.55%.

The RBA's current rate-cutting approach is projected to be less aggressive than previous cycles. While this may temper the rise in housing prices, the landscape is complicated by new government initiatives set for January 2026. The Albanese government plans to facilitate first home buyers to enter the market with just a 5% deposit, without requiring lenders' mortgage insurance, effectively backed by taxpayer guarantees.

Complementary to this, federal and state governments are expanding shared-equity schemes, potentially intensifying demand and driving up home prices further. This confluence of factors presents significant implications for housing affordability in Australia.

A key concern is that these interest rate cuts, along with government schemes, may increase household spending on mortgage payments relative to incomes, even with a modest forecasted dwelling value growth. The Commonwealth Bank of Australia projects dwelling values to grow by 6% in 2025 and 4% in 2026, which, when combined with ongoing demand-side initiatives, could perpetuate a cycle of high mortgages and increased home prices.

Ultimately, while rate cuts and policy measures aim to enhance purchasing power, they seldom improve housing affordability in the structural sense. For affordability to genuinely improve, housing prices must decrease relative to household incomes, a challenging feat amid current market dynamics.

Published:Thursday, 14th Aug 2025
Source: Paige Estritori

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Knowledgebase

Adjustable-Rate Mortgage (ARM):
A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.

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