Australia’s housing market is undergoing a major correction, according to Reserve Bank Deputy Governor Andrew Hauser, who has warned that the inflation outlook has deteriorated significantly ahead of the November interest rate decision, leaving policymakers facing difficult choices between controlling prices and protecting an already weakening economy.
Speaking at Citi’s Australia & New Zealand Investment Conference in Sydney, Mr Hauser acknowledged the growing pressure on households and the property market, but said inflation risks had intensified since the RBA’s August forecasts, despite four interest rate increases this year.
“We’ve got the housing market obviously undergoing quite a major correction and confidence, particularly in the household sector, is very weak,” he said.
The comments come as Australia’s residential property market faces falling values, reduced borrowing capacity and weaker buyer sentiment, raising questions about how much further the Reserve Bank can tighten monetary policy without deepening the downturn.
However, Mr Hauser made clear that weakness in housing and household spending was only part of the picture confronting the Monetary Policy Board ahead of its November meeting.
“The inflation outlook looks materially worse than we projected in the August report,” he said.
The Deputy Governor identified three major risks that had intensified since August, including the prolonged Middle East conflict and its impact on oil prices, the rapid expansion of artificial intelligence and technology investment, and continuing constraints on Australia’s productive capacity.
He said oil prices were now approximately one-third higher than the assumptions underpinning the RBA’s August forecasts, while rising technology costs and the boom in data centre construction were adding further pressure to inflation.
At the same time, domestic productivity growth remained weak, limiting the economy’s capacity to expand without generating additional price pressures.
Mr Hauser said the RBA had already increased interest rates by a total of 100 basis points this year, with the September decision reflecting concerns that inflation risks were becoming more entrenched.
The Board had unanimously supported that increase and indicated it was prepared to act again if necessary.
Nevertheless, the Deputy Governor acknowledged that higher interest rates were having their intended effect on economic activity, with household consumption subdued, employment conditions easing and consumer confidence remaining weak.
“Look, monetary policy is working. Labour market is easing. Consumption growth is quite tepid. But there are still pockets of growth and the inflation outlook has deteriorated,” he said.
For real estate agents, the comments suggest that weaker housing market conditions alone may not be sufficient to prevent another rate increase, particularly if upcoming inflation figures confirm that price pressures remain stronger than the RBA had anticipated.
Mr Hauser said the Board faced a difficult balancing act between allowing inflation to remain elevated and imposing additional financial pressure on households and businesses.
“The challenge that’s facing the Board, it has done for some time, is do you do more to tackle higher inflation, recognising that that means weaker activity, weaker labour market?” he said.
“Or do we hold our horses to protect the labour market, to try and protect some of the labour market, and mindful of the potential that there may be more downside momentum of the economy, but accept the risks in so doing that the upside inflation risk embeds, and that becomes more expensive to deal with?”
Despite the pressure on mortgage holders, Mr Hauser also revealed that household financial buffers remained stronger than might be expected given the extent of interest rate increases.
He said approximately 2 per cent of mortgage holders were in negative cash flow, considerably below the peak recorded in 2024, while the median mortgage holder had more than a year’s worth of cash available in their accounts.
“But the data show that only about 2 per cent of mortgages are actually in negative cash flow,” he said.
“In fact, the median mortgagee has over a year of cash stored away in their accounts to meet those needs should they need to.”
The figures suggest that while higher repayments are weighing heavily on household budgets and borrowing capacity, many existing mortgage holders retain financial buffers that may reduce the immediate risk of widespread mortgage distress.
That distinction is important in assessing vendor behaviour, particularly in a market where falling property values do not necessarily mean homeowners are being forced to sell.
The financial position of renters, however, presents a considerably different picture.
Mr Hauser said approximately 15 per cent of renters were in negative cash flow, highlighting the disproportionate impact of elevated inflation on lower-income households without the financial buffers available to many mortgage holders.
“The greatest pain of higher inflation is held by those without a mortgage who are renting on low incomes,” he said.
He argued that while higher interest rates increased the burden on borrowers, allowing inflation to remain elevated could ultimately impose an even greater cost on financially vulnerable households.
The comments provide a broader perspective on the pressures facing the residential property sector, where agents and property managers are navigating weaker buyer confidence, changing vendor expectations and affordability challenges across both sales and rental markets.
Attention will now turn to the September-quarter inflation figures, which are due before the Reserve Bank’s November policy meeting.
Mr Hauser indicated that the quarterly result was likely to exceed the assumptions contained in the RBA’s August forecasts, although he stressed that the Board would assess the figures alongside broader economic developments rather than respond mechanically to a single inflation reading.
The central bank is also examining whether Australia’s economy has less spare capacity than previously thought, which could make inflation more difficult to contain even as economic growth slows.
For the real estate industry, the message is that the housing downturn has become a significant consideration for monetary policymakers, but it is competing with inflation risks that the RBA believes have intensified.
While the Reserve Bank recognises that higher interest rates are weakening activity and household confidence, the possibility of further tightening remains on the table, leaving buyers, sellers and agents facing continued uncertainty over borrowing costs and the direction of the property market.