Australia Needs More Homes, Yet the RBA Expects Housing Construction to Fall. Could That Push Rents Even Higher?

Australia's housing market is facing an increasingly difficult equation.

The country needs more homes.

Renters are already dealing with elevated housing costs.

Population growth continues to add demand.

Yet the Reserve Bank of Australia now expects dwelling construction activity to begin declining by late 2027 and into 2028.

RBA Assistant Governor Sarah Hunter confirmed the outlook during the AFR Property Summit in Sydney on 8 September 2026.

Hunter stressed that the RBA does not currently expect Australia's housing downturn to trigger a recession.

But she acknowledged that the central bank expects a genuine slowdown in residential construction.

The question for Australia's housing market is what happens after that slowdown.

Because if fewer homes are eventually completed while housing demand remains strong, rental markets could face renewed pressure.

And rents matter not only to tenants.

They also matter directly to Australia's inflation outlook.

Australia's Housing Equation in Numbers

The RBA's August Statement on Monetary Policy shows a clear slowing trajectory for dwelling investment.

Growth is expected to decline from 3.6% in June 2026 to 2.1% by December, then just 0.9% by June 2027.

By December 2027, the RBA expects dwelling investment to be 0.7% lower over the year, before declining 0.8% through the year to June 2028.

That is the background to Hunter's warning.

Why Does the RBA Expect Construction to Slow?

Housing construction does not immediately react when interest rates rise.

There is usually a significant delay.

Projects currently being built may have been:

• purchased years earlier

• approved before interest rates increased

• pre-sold under stronger market conditions

• financed months earlier

• already contracted with builders

• partway through construction

That is why current construction activity can remain relatively strong even after buyer demand weakens.

The RBA specifically notes that residential construction responds to interest-rate changes with a lag.

But eventually weaker demand starts affecting the project pipeline.

Higher rates can reduce borrowing capacity.

Lower property prices can reduce the expected profitability of new projects.

Developers may find projects harder to finance.

Potential buyers may delay purchasing.

And investors may become more cautious about entering new developments.

Those forces can eventually lead to fewer projects proceeding.

The Construction Pipeline Is Still Supporting Activity Today

Australia is not yet experiencing a collapse in housing construction.

In fact, recent National Accounts data showed dwelling investment continuing to grow.

That is partly because builders and developers are still working through previously approved projects.

RBA liaison with the construction industry confirms this.

The Bank says many builders continue to work through existing pipelines, but industry contacts expect activity to slow as weaker sales flow through to future construction.

Developers told the RBA that softer housing sales reflected factors including:

higher interest rates, higher borrowing costs, elevated construction costs and uncertainty around housing prices.

In other words, today's construction activity may be telling us more about decisions made in the past than about what developers will build several years from now.

Home Lending Is Already Cooling

The finance data provides an earlier warning signal.

The ABS reported that the total number of new dwelling loan commitments fell 5.4% during the June quarter to 134,225.

The value of new home lending also fell 5.2%.

Every major borrower category weakened.

Owner-occupier loan commitments fell 3.3%.

First-home buyer commitments fell 2.9%.

But the sharpest decline occurred among property investors.

Investor lending fell 8.6%

The number of new investor loans dropped 8.6% during the quarter, equivalent to 4,966 fewer loans.

Their total value fell even more sharply, by 10.2%.

That was the largest quarterly decline in investor loan numbers since September 2022.

Investor activity matters because private investors provide a large proportion of Australia's rental housing.

If investor demand weakens substantially, the effects can eventually reach both new construction and rental supply.

Building Approvals Are Sending Mixed Signals

The latest building-approval numbers tell a nuanced story.

Australia approved 17,687 dwellings in July 2026.

That was:

3.6% lower than June

but still:

9.0% higher than July 2025.

Private house approvals fell 4.2% during the month to 10,199.

Approvals for private dwellings excluding houses, which include apartments and other higher-density housing, fell only 0.4% and remained 19.9% higher than a year earlier.

So the pipeline has not disappeared.

But approvals are only one stage of the process.

An approved project still needs to be financed, sold, commenced and completed.

That distinction becomes particularly important in a higher-rate environment.

Commencements Have Already Been Volatile

Earlier ABS data showed total dwelling commencements fell 11.2% in the March quarter, to approximately 48,012 homes.

Private house commencements dropped 3.5%.

Other residential commencements, including apartments, fell a much sharper 20.7%.

Quarterly figures can be volatile.

But when weaker lending, softer property sales and falling commencements are considered alongside the RBA's forecast, the direction of travel becomes easier to understand.

Construction activity may remain supported in the near term by projects already underway.

The real concern is what replaces them.

Why Falling Construction Could Matter for Renters

Housing markets ultimately depend on supply and demand.

If Australia builds fewer homes while demand continues growing, pressure on the existing housing stock can intensify.

Sarah Hunter specifically acknowledged this issue at the AFR Property Summit.

She said the RBA is paying very close attention to rents, noting that rental growth has been considerably stronger than it was before COVID.

The RBA's concern is straightforward.

Fewer homes completed today can mean fewer homes available to:

• owner-occupiers

• first-home buyers

• investors

• tenants

in the future.

If rental demand continues to increase faster than the number of available rental properties, rents can rise.

Rents Are Already Growing 3.6% Annually

The latest ABS Consumer Price Index confirms that rental pressure remains significant.

Australian rental prices increased 3.6% in the 12 months to July 2026.

That rate has remained unchanged for three consecutive months.

The RBA's June-quarter data similarly showed rental inflation of 3.6% annually.

This is slower than some of the extraordinary increases seen earlier in the post-pandemic rental cycle.

But rental growth remains materially stronger than the rates typically recorded before COVID, according to the RBA.

And rental vacancy conditions remain relatively tight.

That is why the future construction pipeline matters.

Why Rents Matter to the RBA

House prices are not directly included in the Consumer Price Index.

Rents are.

That makes rental inflation particularly important for monetary policy.

The RBA is trying to return inflation sustainably to its 2% to 3% target range.

If rental costs remain elevated because housing supply does not keep pace with demand, that can make inflation more persistent.

Sarah Hunter described rents as a key CPI component and said the Bank actively monitors the balance between housing demand and supply in local markets.

This creates an uncomfortable policy tension.

Higher interest rates can help reduce inflation by slowing demand.

But those same higher rates can also make housing development less attractive or more expensive.

If that eventually reduces housing supply, rental inflation could remain stronger than otherwise.

Higher Rates Can Cool Demand and Supply Simultaneously

This is perhaps the central lesson from the RBA's housing discussion.

Interest-rate increases do not affect only people purchasing established homes.

They also affect developers and builders.

Consider a large residential project.

The developer may require debt funding to purchase land and finance construction.

Higher interest rates increase that funding cost.

At the same time, potential apartment buyers may have lower borrowing capacity.

That can weaken pre-sales.

Lower property prices can reduce expected project revenues.

Higher construction costs can squeeze margins further.

The developer can therefore face:

higher costs + weaker sales + reduced prices

at the same time.

A project that was financially viable under previous market conditions may no longer stack up.

If enough projects are delayed or cancelled, today's demand slowdown becomes tomorrow's supply shortage.

Construction Costs Remain Another Problem

Interest rates are not the only challenge.

The ABS reported prices for new dwellings were 5.7% higher over the year to July 2026.

The RBA has also highlighted ongoing capacity constraints in construction.

Industry contacts have told the Bank they continue to struggle to obtain enough skilled tradespeople to complete available work.

The RBA has also heard early reports that large data-centre and infrastructure projects may be drawing workers away from other areas of construction, particularly in Sydney and Melbourne.

That creates another challenge.

Australia needs more residential construction.

But builders are competing for:

• labour

• materials

• finance

• land

• infrastructure capacity

with other sectors of the economy.

Could Falling Construction Push House Prices Back Up?

Potentially.

Sarah Hunter also addressed this directly.

The RBA expects housing prices to eventually find a bottom and begin recovering.

One reason is the underlying supply constraint.

If population and housing demand continue to grow while construction slows, fewer available properties can eventually create renewed upward pressure on prices.

This does not mean house prices must immediately rebound.

Higher mortgage rates, weaker borrowing capacity and softer sentiment can continue putting downward pressure on prices.

But over longer periods, housing supply matters enormously.

That creates a potentially unusual sequence:

Higher rates → lower demand → lower prices → less construction → tighter future supply → renewed price and rental pressure.

The timing of each stage can be very different.

Why Australia's Housing Market Can Look Contradictory

This is another reminder that there is no single housing-market indicator.

Several apparently contradictory conditions can coexist.

Australia can simultaneously have:

Falling established home prices

because buyers have less borrowing capacity.

Growing current construction activity

because projects started earlier are still being completed.

Falling home-loan demand

because buyers and investors are becoming more cautious.

Elevated rents

because rental supply remains constrained.

Weak future construction forecasts

because fewer developments may become viable.

All of those things can be true at the same time.

The housing market operates through different cycles and different time lags.

The RBA Is Not Forecasting a Recession

The construction slowdown should also be kept in perspective.

Some property industry participants have warned that the housing downturn could trigger a broader recession.

Sarah Hunter said that is not the RBA's baseline forecast.

The RBA expects housing to slow economic activity.

Indeed, that is partly the purpose of tighter monetary policy.

The central bank is trying to reduce demand enough to bring inflation back toward target.

Housing is one of the main channels through which that policy works.

Lower turnover reduces spending on services associated with property transactions.

Lower property wealth can affect household spending.

And eventually weaker housing conditions affect residential construction.

The RBA expects those effects to slow the economy without producing a recession under its central forecast.

What Could This Mean for Property Investors?

For investors, the outlook is complicated.

Higher borrowing costs make leveraged property investment more expensive.

At the same time, rental markets remain relatively tight.

Future housing supply could also weaken.

An investor therefore needs to consider more than the direction of property prices.

Important factors include:

• financing costs

• rental income

• vacancy rates

• local supply pipelines

• property type

• tax position

• holding costs

• borrowing capacity

• investment horizon

A market with falling property prices today may eventually experience tighter rental conditions if construction activity drops substantially.

But that does not automatically make every investment financially attractive.

The numbers still need to work for the individual investor.

What Could This Mean for Home Buyers?

Prospective buyers also face competing forces.

Falling property values may improve negotiating power.

But higher mortgage rates can reduce borrowing capacity.

Meanwhile, if future construction slows, buyers looking for newly built housing may eventually encounter more limited supply.

That is why borrowing capacity should be understood before choosing a property purely based on market headlines.

Potential buyers should consider:

What can I borrow today?

What repayment can I comfortably manage?

What happens if rates rise again?

Would buying established or building new suit my circumstances better?

What deposit and cash buffer will I retain after settlement?

Those questions can be more useful than trying to predict exactly where the housing market will bottom.

What About Construction Loans?

For people planning to build, the current environment makes finance preparation particularly important.

Construction loans generally operate differently from standard loans used to purchase completed homes.

Funds are typically released through progressive payments as different construction stages are completed.

Lenders may review:

• land value

• building contract

• approved plans

• construction costs

• builder credentials

• contingency funds

• valuation

• borrower contribution

• servicing capacity

Rising building costs can also affect project budgets.

Someone considering construction should therefore understand both the cost of the build and the lending structure before committing to the project.

The Bigger Housing Challenge: Today vs Tomorrow

Australia's housing problem increasingly involves two different timelines.

Today's problem

Interest rates are high.

Buyer demand is softer.

Property prices are falling.

New lending is declining.

Tomorrow's problem

If weaker demand causes fewer homes to be developed and built, supply may become even tighter.

That can create future pressure on:

rents, home prices and housing availability.

The RBA is trying to cool demand today without creating an economic downturn.

But monetary policy cannot directly create more homes.

Housing supply ultimately depends on factors including planning, land, infrastructure, building capacity, construction costs and project finance.

That is why the housing debate cannot be reduced to the cash rate alone.

Australia Needs More Homes. But Will We Build Enough?

The latest RBA forecast deserves attention because housing construction responds slowly.

A development that is cancelled in 2026 may not show up as a missing completed home until several years later.

The RBA currently expects dwelling investment growth to turn negative by the end of 2027.

At the same time:

new home-loan numbers are down 5.4%, investor lending is down 8.6%, July building approvals fell 3.6% month-on-month, and rents are still rising 3.6% annually.

None of those figures alone proves Australia will experience another rental squeeze.

But together they demonstrate why future housing supply deserves close attention.

Australia may succeed in cooling today's housing demand.

The bigger question is whether enough homes will still be built for tomorrow.

Planning to Buy, Build, Invest or Review Your Finance?

At Loan & Own Mortgages, we help Australian home buyers, investors, self-employed borrowers and property owners understand their lending options in changing market conditions.

Whether you are purchasing an established home, considering construction, reviewing an investment or assessing your borrowing capacity, understanding your finance position early can help you make more informed decisions.

Housing conditions may change.

Interest rates may change.

But knowing your numbers gives you a stronger starting point.

Speak with Loan & Own Mortgages to understand your home-loan, construction-finance or property-investment options.

Data Sources

Reserve Bank of Australia, AFR Property Summit, 8 September 2026: Assistant Governor Sarah Hunter said the RBA expects dwelling construction activity to decline around late 2027 into 2028, while a recession is not the Bank's baseline forecast. She also highlighted rents as an important inflation channel.

RBA Statement on Monetary Policy, August 2026: Dwelling investment growth is forecast to slow from 3.6% in June 2026 to 0.9% by June 2027, before declining 0.7% through the year to December 2027 and 0.8% through the year to June 2028.

Australian Bureau of Statistics, Lending Indicators, June Quarter 2026: Total new dwelling loan commitments fell 5.4%, owner-occupier commitments fell 3.3%, and investor commitments fell 8.6%.

Australian Bureau of Statistics, Building Approvals, July 2026: Total dwelling approvals fell 3.6% during July to 17,687, although approvals remained 9.0% higher than a year earlier.

Australian Bureau of Statistics, CPI July 2026: Rents increased 3.6% over the year while new dwelling prices increased 5.7%.

This article contains general information only and does not constitute personal financial, credit, investment, tax or legal advice. Lending eligibility, rates, borrowing capacity and suitable finance structures depend on individual circumstances and lender assessment.