The biggest challenge facing the property market right now is not interest rates, inflation or even affordability – it is uncertainty.
Uncertainty has always been part of property markets, but it rarely dominates them. Typically, there is a central narrative – interest rates are rising or falling, growth is strengthening or slowing – and markets adjust accordingly.
Right now, that clarity is missing. Multiple forces are moving at once, often in conflicting directions, making it difficult to form a confident view on what comes next. It is this lack of clarity, rather than any single variable, that is now shaping behaviour across the housing market.
At the centre of this uncertainty sits the Reserve Bank of Australia, facing one of the most difficult policy environments in recent decades.
The task is straightforward in theory but far more complex in practice: bring inflation under control without pushing the economy into recession.
Inflation remains elevated, but the full impact of earlier rate increases is still flowing through to households and businesses. The risk is that tightening too far, or too quickly, amplifies this slowdown into something more severe.
Despite this, financial markets and many forecasters continue to price in further rate increases – sometimes as many as four. While this provides a useful benchmark, it risks creating a false sense of precision.
The outlook for interest rates is highly variable and subject to rapid change. A shift in inflation data, global conditions or geopolitical tensions could materially alter the expected path of policy. Forward expectations are therefore less a roadmap and more a reflection of current assumptions that may not hold.
This uncertainty is compounded by the nature of the current inflation problem. A large share of inflation is being driven by global factors that sit outside the control of monetary policy.
Interest rate rises won’t stop the Middle East conflict or resolve supply chain disruptions. It is reasonable to suggest that as much as 60 to 70 per cent of current inflation is coming from these sources.
However, the RBA cannot remain passive. It must act on what it can control, even if that means targeting parts of the economy that are not the main drivers of inflation.
In practice, this means households and businesses carry the burden of adjustment, despite the largely external nature of the problem. This creates an inherently imperfect policy environment, where the risk of doing too much sits alongside the risk of doing too little.
The visibility of certain inflation components is also shaping sentiment. Petrol prices, in particular, are highly visible, updated frequently and felt immediately.
They act as a constant reminder of rising living costs. These pressures are now clearly reflected in consumer sentiment, with ANZ-Roy Morgan confidence at its lowest level since the survey began in 1973.
The duration and trajectory of the Middle East conflict adds a further layer of uncertainty. There is no clear timeline for resolution, and each escalation has the potential to disrupt energy markets and inflation expectations. For policymakers, this makes forward planning difficult. For households and investors, it reinforces caution.
Within the housing market, these forces are producing a more complex outcome than might typically be expected in a rising rate environment.
Higher interest rates and uncertainty are moderating price growth, which is not necessarily a bad outcome given the strength of recent gains across many parts of Australia.
At the same time, housing supply is becoming more constrained. Construction costs were already rising due to labour shortages, and materials costs are now increasing again, with supply chains under pressure.
While prices are moderating due to higher interest rates, ongoing shortages and rising building costs are likely to create longer-term upward pressure.
Adding to this complexity is the uncertainty surrounding fiscal policy. The Federal Budget, due in May, introduces another unknown. Potential changes to tax settings, particularly those affecting property investors, remain speculative.
Even without confirmed changes, the possibility alone can influence behaviour, with investors delaying or bringing forward decisions.
However, uncertainty does not persist indefinitely. Once uncertainty begins to resolve, activity tends to improve, even if the outcome itself is not entirely positive.
A further interest rate increase, for example, may weigh on borrowing capacity, but it also provides clarity. Markets are generally better at dealing with known conditions than unknown ones.
The same applies more broadly. Greater visibility on interest rates, clearer signals from the Federal Budget, or a stabilisation – and ultimately resolution – of geopolitical tensions would all help reduce uncertainty.
The end of the Middle East conflict would clearly be a positive outcome, but even incremental clarity around its trajectory would be meaningful.
For the housing market, this matters. Periods of heightened uncertainty tend to suppress activity rather than alter long-term demand.
As uncertainty lifts, delayed decisions are brought forward, supporting a recovery in transaction volumes. In that sense, while uncertainty is currently the defining force in the property market, it is also temporary – and as it clears, more stable conditions will follow.