Could Falling House Prices Actually Stop the RBA From Hiking Rates Even Further?

Australian mortgage holders face another crucial Reserve Bank decision tomorrow.

The RBA cash-rate target currently stands at 4.35%, after three increases during 2026, and the Monetary Policy Board is meeting across 28 and 29 September. Its decision is scheduled for 2:30 pm AEST on Tuesday. Reserve Bank of Australia

Economists and financial markets widely expect another 25-basis-point increase, which would take the cash rate to 4.60%. ABC reported today that another increase is viewed as highly likely, although the decision remains with the RBA Board. ABC News

But there is another force working in the opposite direction.

Australia's housing market has been weakening.

And falling house prices can themselves tighten financial conditions.

That means the property downturn could eventually become one reason the RBA does not need to keep increasing interest rates as aggressively as it otherwise might.

The RBA itself has explicitly acknowledged this transmission channel.

Governor Michele Bullock told Parliament this month that lower housing prices can reduce household consumption by lowering net wealth, decrease housing turnover and weaken residential investment. Those effects reduce demand and can ultimately help lower inflation. Reserve Bank of Australia

That does not mean falling property prices automatically prevent another rate rise.

But it does mean the housing downturn is increasingly relevant to the question of how high rates ultimately need to go.

The RBA Does Not Target House Prices

This distinction is important.

The Reserve Bank does not have a target for Australian house prices.

Its mandate is centred on price stability and full employment.

Governor Bullock has repeatedly emphasised that the Bank watches housing because housing affects economic activity, spending and inflation, not because the RBA is trying to achieve a particular property-price level. Reserve Bank of Australia

So the RBA would not normally say:

"House prices have fallen enough, so we will stop raising rates."

The logic is more indirect.

Falling prices can reduce household wealth.

Lower turnover can reduce spending.

Higher rates can weaken borrowing activity.

Residential construction can soften.

Consumer confidence can deteriorate.

Together, those developments can slow demand.

And weaker demand is exactly what restrictive monetary policy is trying to achieve.

Housing Is One of Monetary Policy's Biggest Transmission Channels

When the RBA raises interest rates, Australians usually think first about mortgage repayments.

But the effect reaches further.

Higher rates can:

reduce borrowing capacity,

increase repayments,

discourage new property purchases,

reduce investor demand,

lower property turnover,

weaken housing prices,

and influence household spending.

The RBA's August Statement on Monetary Policy said established housing conditions had softened more than expected, with house prices declining as earlier cash-rate increases and other policy changes flowed through the market. Reserve Bank of Australia

This is monetary policy doing what it is designed to do.

The important question now is whether enough tightening has already been delivered.

Falling House Prices Can Make Households Feel Less Wealthy

Economists often refer to the "wealth effect."

Imagine a household owns a property worth $1.2 million.

If the value rises to $1.35 million, the household may feel financially stronger even though that additional equity is not sitting in a bank account.

That confidence can influence behaviour.

The household might:

renovate,

buy a vehicle,

take a holiday,

replace furniture,

or feel more comfortable spending generally.

Now reverse the process.

Suppose that $1.2 million property falls to $1.05 million.

The household may become more cautious.

It may postpone purchases.

Save more.

Delay renovations.

Or simply feel less financially secure.

The RBA says this effect is one channel through which lower housing prices can reduce household consumption. Reserve Bank of Australia

But the Wealth Effect Is Not Necessarily Huge

There is an important qualification.

RBA Assistant Governor Sarah Hunter said earlier this month that the direct wealth effect from declining housing prices is relatively modest in the short term.

A more immediate effect comes from lower housing turnover.

When people move house, they commonly spend money on:

furniture,

appliances,

renovations,

moving services,

homewares,

and other household items.

When fewer homes change hands, that associated spending declines as well. Reserve Bank of Australia

That means a housing slowdown can reduce consumer activity even if most homeowners never consciously change spending because their property's estimated value has fallen.

Property Turnover Is Already Falling

The RBA has already observed this effect.

Sarah Hunter said housing turnover fell in the March quarter, fell again during the three months to June and appeared likely to have weakened further in the current quarter. Reserve Bank of Australia

This matters because housing turnover generates substantial secondary economic activity.

A property purchase can trigger spending on:

conveyancing,

mortgage services,

inspections,

removalists,

furniture,

appliances,

repairs,

renovations,

and landscaping.

When transactions slow, all of that activity can soften.

So the property market can tighten financial conditions without every household experiencing an increase in its mortgage rate.

The RBA Already Expected Housing Prices to Decline

The Reserve Bank's August economic forecasts assumed that Australian housing prices would continue falling gradually for a period.

The RBA said lower property prices were expected to weigh on household consumption through reduced household wealth and weaker housing-turnover-related spending. Reserve Bank of Australia

That means some housing weakness is already embedded in the Bank's economic outlook.

The key question is whether the downturn becomes larger than anticipated.

Governor Bullock recently described a larger-than-expected deterioration in housing as a potential downside risk to economic activity. Reserve Bank of Australia

That is where the interest-rate implications become more significant.

A Deeper Property Downturn Could Do Some of the RBA's Work

Consider what an additional rate increase is supposed to achieve.

The RBA wants demand growth to slow sufficiently for inflation to return sustainably to its 2% to 3% target range.

Higher mortgage repayments help accomplish that.

But so can:

declining property wealth,

lower housing turnover,

reduced construction activity,

weaker consumer confidence,

and less discretionary spending.

If those forces become stronger than expected, the economy may already be slowing enough without multiple additional interest-rate increases.

This is why property prices can indirectly influence the eventual peak in the cash rate.

Not because the RBA protects property owners from falling prices.

Because weaker housing conditions can reduce inflationary demand.

Today's Housing Downturn Is Already Larger Than the RBA Expected Earlier

In its August Statement, the RBA said housing-market conditions had eased considerably more than assumed in its May forecasts.

At that point, national housing prices were around 1.6% below their March peak, while auction clearance rates had weakened. Reserve Bank of Australia

Since then, the RBA has continued to acknowledge further softness.

Governor Bullock told Parliament on 18 September that prices had declined across most capital cities and new housing loans had fallen. Reserve Bank of Australia

She made the same broader point four days later at a CEDA discussion: the housing market had begun softening before some of the more recent global inflation shocks emerged. Reserve Bank of Australia

That gives the Board another factor to consider alongside inflation.

But Inflation Is Still Too High

This is why tomorrow's decision remains difficult for borrowers.

Housing is weakening.

But inflation has not yet returned to target.

The RBA's August Statement said inflation remains too high and is not expected to return to the middle of the 2% to 3% target band until early 2028. Reserve Bank of Australia

At its August meeting, the Board said headline inflation remained too high and trimmed mean inflation remained elevated, while some firms were still passing higher costs through to prices. Reserve Bank of Australia

The central bank therefore has two competing risks.

Raise rates too little:

inflation may remain high.

Raise rates too much:

the economy and housing market may weaken more than necessary.

Monetary policy is about balancing those risks.

This Is Why One More Hike Does Not Necessarily Mean Many More

Even if the RBA increases the cash rate to 4.60% tomorrow, the housing downturn could still influence what happens after that.

The Board may ask:

How much are earlier rate rises still flowing through to mortgage repayments?

How much further could housing prices fall?

Is household spending weakening?

Are borrowers using savings buffers?

Is unemployment rising?

Are inflation pressures broadening or easing?

Has construction activity weakened?

The answer to those questions will help determine whether monetary policy needs to become even tighter.

So a September increase and a less aggressive hiking cycle afterwards are not contradictory possibilities.

Monetary Policy Works With a Delay

Another reason this matters is that rate rises do not affect the economy instantly.

The RBA has increased the cash rate three times during 2026, from 3.60% at the end of 2025 to the current 4.35%. Reserve Bank of Australia

Those increases are still working their way through:

mortgage repayments,

household budgets,

business borrowing,

property demand,

and consumer spending.

The RBA itself says the full effects of this year's tightening have not yet been felt. Reserve Bank of Australia

That creates the risk of overtightening.

By the time economic weakness becomes obvious, interest rates may already have been restrictive for months.

Consumer Spending Is the Number the RBA Ultimately Cares About

Lower house prices matter mainly because of what they do to demand.

The latest available ABS household-spending data showed spending rose 1.1% in July and was 7.0% higher than a year earlier in nominal terms. Australian Bureau of Statistics

However, the RBA's broader assessment is that spending growth is expected to slow as tighter monetary policy continues to bite. Reserve Bank of Australia

The next ABS monthly household spending update, covering August, is scheduled for 29 September, the same day as the RBA decision. Australian Bureau of Statistics

That creates another interesting timing issue.

Tomorrow's RBA decision will be released before the newest household-spending data becomes available.

Consumer Confidence Is Also Weak

The RBA's August assessment noted that consumer sentiment remained very weak.

It attributed that weakness to several factors, including:

recent cash-rate increases,

cost-of-living pressure,

global uncertainty,

and a softening housing market. Reserve Bank of Australia

Weak confidence does not automatically mean households stop spending.

The RBA notes that income and wealth are generally more important fundamental drivers.

But sentiment can reinforce cautious behaviour.

For mortgage borrowers already experiencing:

higher repayments,

falling property values,

and cost-of-living pressure,

another rate increase can amplify that caution.

Falling Prices Can Also Reduce Residential Investment

There is another channel that receives less attention.

When property prices fall, building new housing can become less attractive financially.

Developers compare expected selling prices with:

land costs,

construction costs,

financing costs,

labour,

materials,

and expected profit.

If selling prices fall while borrowing and construction costs remain elevated, some proposed developments may no longer stack up.

The RBA's August outlook acknowledged that weaker housing prices can reduce incentives to build new homes, although it expects the immediate effect to be moderated by the existing pipeline of construction work. Reserve Bank of Australia

That creates a complicated long-term issue.

Lower housing prices can reduce near-term inflationary demand.

But weaker construction could ultimately worsen housing supply constraints.

Falling House Prices Do Not Help Every Borrower

A weaker housing market may potentially reduce the need for higher rates later.

That does not mean falling prices are good news for all mortgage holders.

Recent buyers can be particularly exposed.

Suppose someone bought a property for $900,000 with a $810,000 mortgage.

Their starting LVR is:

90%.

If the property later falls to $850,000 while the mortgage remains close to $800,000, their LVR rises sharply.

That can make refinancing harder.

The borrower may find a better mortgage rate at another bank but struggle to qualify because their equity has fallen.

So the same housing downturn that might eventually reduce inflation can create immediate problems for individual homeowners.

Negative Equity Remains Limited Overall

There is some reassurance in the broader data.

The RBA says negative equity remains very limited across Australian mortgage borrowers.

Governor Bullock said in July that fewer than 1% of borrowers were estimated to be in negative equity, while most borrowers continued to hold meaningful savings buffers. Reserve Bank of Australia

She repeated in September that only a small share of borrowers were experiencing severe repayment difficulty. Reserve Bank of Australia

So today's housing correction does not currently look like a broad financial-stability crisis.

But financial stability and household comfort are different things.

A borrower can remain technically solvent while still experiencing serious pressure from falling equity and higher repayments.

Why the RBA Could Still Hike Tomorrow

If lower property prices are helping slow demand, why would the RBA raise rates at all?

Because inflation remains the immediate problem.

The Bank assesses many indicators simultaneously.

Housing is one.

Others include:

services inflation,

wages,

labour-market conditions,

business pricing behaviour,

oil and energy costs,

the exchange rate,

household spending,

and inflation expectations.

Today's ABC preview reports that economists and financial markets see another September increase as highly likely. ABC News

That reflects the inflation side of the equation.

Housing weakness reflects the growth side.

The Board has to weigh both.

The Important Question May Be What Happens After Tuesday

For mortgage holders, the more important question may therefore not be:

"Will the RBA raise rates tomorrow?"

It may be:

"If it does, how much further will rates need to rise after that?"

A deeper housing downturn could become an important argument against a long sequence of additional increases.

That is not a prediction.

It is the transmission mechanism the RBA itself describes.

Lower house prices can weaken household wealth, turnover, spending and investment.

Those forces reduce demand.

And lower demand helps reduce inflation. Reserve Bank of Australia

A 4.60% Cash Rate Could Intensify the Housing Slowdown

If tomorrow's expected 25-basis-point increase occurs, the cash rate would reach 4.60%.

Variable mortgage rates would not necessarily rise by exactly the same amount for every borrower, because lenders determine their own pricing.

But another increase would likely place additional pressure on:

borrowing capacity,

new buyers,

investor demand,

existing mortgage repayments,

and property sentiment.

That could weaken housing further.

The stronger that feedback becomes, the more relevant the housing market becomes to subsequent RBA decisions.

Rate Hikes Can Become Self-Limiting

This is one way to understand the current situation.

Higher interest rates reduce housing demand.

Lower demand pushes property values and transactions lower.

Lower property wealth and turnover weaken consumer spending.

Weaker spending slows economic demand.

Lower demand reduces inflation pressure.

Reduced inflation pressure eventually lowers the need for additional monetary tightening.

That does not happen immediately.

And global inflation shocks can interrupt the process.

But it explains why the effect of interest-rate rises can eventually reduce the need for more of them.

Borrowers Should Not Build Their Strategy Around a Rate Forecast

None of this means mortgage holders should assume rates are about to peak.

Forecasting central-bank decisions remains difficult.

Economic conditions can change quickly.

Oil prices can move.

Inflation data can surprise.

Employment can strengthen or weaken.

Global markets can change funding conditions.

A more practical approach is to stress-test several scenarios.

What happens if your rate rises another 0.25%?

What if rates stay elevated throughout 2027?

What if house prices fall another 5%?

Would your current equity still allow refinancing?

Is your existing mortgage competitively priced?

Could your lender reduce your rate?

Those are questions households can answer without predicting the RBA.

Falling House Prices Can Make Mortgage Reviews More Urgent

When property prices are rising, borrowers often build equity almost automatically.

That can make refinancing easier.

When prices are falling, the opposite can happen.

Your mortgage balance may decline slowly while your property value falls faster.

That pushes LVR higher.

A borrower who currently has enough equity to access competitive refinance options may therefore have fewer choices later if the market deteriorates.

This does not mean refinancing immediately is always appropriate.

But understanding the equity position early can be valuable.

Check Your Current LVR

A basic estimate is:

Mortgage balance ÷ property value × 100

For example:

Mortgage balance: $600,000
Estimated property value: $800,000

Approximate LVR:

75%

If the property falls to $720,000 while the mortgage remains at $600,000:

LVR rises to roughly 83%.

That change can affect:

lender choice,

interest-rate tiers,

LMI considerations,

and refinancing options.

Property-price movements therefore matter even when you have no intention of selling.

The Bigger Lesson: Falling House Prices Can Tighten Financial Conditions Too

Interest rates are not the only thing slowing the Australian economy.

Housing can do part of the work.

Lower property prices can:

reduce household wealth,

weaken consumer confidence,

reduce turnover,

lower spending associated with moving,

reduce residential investment,

and affect borrowing capacity.

The RBA explicitly recognises these channels. Reserve Bank of Australia

That is why a deeper-than-expected housing downturn could eventually reduce the amount of additional monetary tightening required.

It does not guarantee lower rates.

It does not guarantee tomorrow's hike will be cancelled.

But it changes the economic equation.

Could Falling House Prices Actually Stop the RBA From Hiking Rates Even Further?

Possibly, if the property downturn becomes severe enough to slow household spending and economic activity materially.

But housing is only one part of the RBA's decision.

Inflation is still above target.

Global cost pressures remain significant.

And the Board will continue assessing whether demand is slowing quickly enough.

The cash rate currently stands at 4.35%.

Tomorrow's decision may take it higher.

But the housing downturn could become one of the most important forces determining what happens after that. Reserve Bank of Australia

For mortgage holders, that means watching more than the RBA announcement.

Watch property values.

Watch household spending.

Watch lending activity.

Watch inflation.

Those indicators together will help shape the next phase of Australia's interest-rate cycle.

Is Your Mortgage Prepared for Both Higher Rates and Lower Property Values?

At Loan & Own Mortgages, we help Australian homeowners understand how changes in both interest rates and property values can affect their home-loan position.

That can include reviewing:

your existing mortgage rate,

estimated property value,

loan-to-value ratio,

equity,

refinancing eligibility,

loan structure,

and available lender options.

Another RBA increase may affect repayments.

A housing downturn may affect equity.

Both matter.

Speak with Loan & Own Mortgages to understand how your current home loan is positioned before making your next move.

Data sources

Reserve Bank of Australia, 18 September 2026: Governor Michele Bullock said housing conditions have softened and that a larger-than-expected decline could become a downside risk to economic activity. She explained that lower house prices can reduce consumption through household wealth, housing turnover and residential investment. Reserve Bank of Australia

Reserve Bank of Australia, 22 September 2026: Governor Bullock reiterated that the RBA does not target house prices but monitors housing because interest-rate increases can affect household wealth, property turnover and spending. Reserve Bank of Australia

RBA August 2026 Statement on Monetary Policy: Housing-market conditions had eased more than expected, with national housing values 1.6% below their March peak at the time of the report. The RBA expected prices to continue declining gradually. Reserve Bank of Australia

RBA August 2026 Statement on Monetary Policy: Inflation remains too high and is not expected to return to the middle of the RBA's 2% to 3% target range until early 2028. Reserve Bank of Australia

Australian Bureau of Statistics, July 2026: Household spending increased 1.1% month-on-month and 7.0% year-on-year in nominal terms. Australian Bureau of Statistics

Reserve Bank of Australia: The cash-rate target remains 4.35%, with the next monetary-policy decision scheduled for 29 September 2026 at 2:30 pm AEST. Reserve Bank of Australia

ABC News, 28 September 2026: Economists and financial markets broadly expect the RBA to raise rates again at its September meeting, although the Board has not yet made its decision. ABC News

This article provides general information only and does not constitute personal financial, credit, investment, tax or legal advice. Property values, mortgage rates, lending policies, RBA decisions and refinancing eligibility can change and depend on individual circumstances.