2026’s RATE CUTS WILL ADD $60,000 TO THE PRICE OF A TYPICAL SYDNEY HOUSE
We’ve had two rate cuts this year, and there’ll be another two (or even three) by Christmas.
And that’s great. But it will also come at a cost to those hoping to break into the money printing machine that is the Australian housing market.
The last three years saw a huge natural experiment ... Was the worsening in Australian housing affordability because –
(1) money was too cheap for too long (an interest rate story), or was it because
(2) we haven’t approved enough, and what we do approve comes with costly rules and regulations attached (a housing supply story)?
We now know the answer: housing prices survived the rapid rise in interest rates in recent years, meaning that affordability has tanked mainly because of the decades of dumb we’ve done in housing.
(By the way, the rise in rates in recent years was the equivalent of abolishing negative gearing nine times over – both rates and negative gearing simply affect the after-tax cost of capital. So no, there’s no magic wand to wave in housing policies.)
The politicians increasingly know all that, so they’re starting to do things about housing supply. But to date their measures are small and slow, and the recent federal election saw both sides promise more money faster for raising demand than for boosting supply.
Even more challengingly, to say that a lack of housing supply has caused the most damage to affordability is not the same thing as saying interest rates don’t have an impact on prices.
Rates still matter a lot. The pre-COVID rule of thumb was that every 1pp drop in mortgage rates added around 6 or 7% to housing prices.
Given just how stretched the latter already are, today’s market may be less interest rate sensitive.
Yet, even if that old rule of thumb has become a 1pp drop in mortgage rates adding ‘only’ 4% to housing prices, that says 2026’s rate cuts – likely to total 1pp or 1.25pp – will add at least $60,000 to the price of the typical Sydney home and $40,000 to the price of a typical Sydney apartment.
That will be a reminder that, no matter how much you avoid smashed avocado, the pressures on younger Australians will continue to grind higher, and that Australian housing policies remain in desperate need of an overhaul.