Double Blow: Cash Rate Rises, Home Approval Crash
The property development sector has copped a double blow as the Reserve Bank raised the cash rate on the same day data revealed apartment approvals plunged 29.8 per cent, creating renewed pressure on project feasibility and presales campaigns.
The 25 basis point increase to 3.85 per cent is the first rate rise since November 2023.
The bank said the economy was running hotter than expected, with business investment growing strongly.
Credit remains readily available to both households and businesses but the RBA warned last year’s rate cuts will continue to boost demand over coming months, adding to capacity pressures.
While a cash rate hike was widely tipped, Oliver Hume Property Group chief economist Matt Bell said the decision had not been a sure thing.
“Financial markets had priced in about a 66 per cent chance of a 0.25 per cent hike,” he said.
Bell said the decision signalled the end of a significant turnaround in market expectations. Markets expected three more rate cuts by the end of 2026 as late as July 2025.
Domain chief of research and economics Dr Nicola Powell said the shift in market expectations has implications for housing demand and project feasibility.
“Only a few months ago, the conversation was about more rate cuts,” Powell said. “Now, the reality is that interest rates may stay elevated for longer and that has real consequences on the housing market.”
The rate increase follows inflation picking up in the second half of 2025, with unit labour cost growth remaining high.
Powell said higher rents, insurance and energy costs are still feeding through while labour market strength is restricting the RBA’s capacity to ease rates.
REA Group senior economist Angus Moore said another rate hike was expected by mid-to-late 2026 depending on how persistent inflation proves.
“Home prices are still expected to grow across 2026,” Moore said. “However, higher rates this year will slow price growth down.”
The rate increase comes as property sales activity faces headwinds from reduced end-buyer borrowing capacity.
“For borrowers, this means less borrowing power and a more challenging lending environment,” Powell said. “That tends to cool buyer urgency, encourage more cautious bidding and bring a more measured feel to auctions and private treaty negotiations.”
Powell said supply constraints would continue to underpin prices.
“We’re not talking about a sharp correction,” Powell said, adding that higher borrowing costs will slow things down and reduced buyer capacity typically extends presales timelines and tightens feasibility margins for new apartment projects.
Bell said the increase was unlikely to derail recoveries in markets like Melbourne’s established and land sectors.
“Price growth in Brisbane, Perth and Adelaide remains hot which should help Melbourne take some advantage of its strong affordability levels,” Bell said.
Home approvals plummet
Meanwhile, the total number of homes approved for construction fell sharply in December 2025, with 15,542 homes receiving approval, down 14.9 per cent from the previous month, according to ABS data.
The drop was a significant reversal after a rise in November, highlighting ongoing volatility in the nation’s housing sector.
Approvals for private sector houses rose slightly—up 0.4 per cent to 9487 homes— showing some resilience in detached home construction.
By contrast, approvals for private sector homes excluding houses, such as apartments and townhouses, dropped 29.8 per cent to just 5855 homes.
The overall value of total residential building work approved also declined, down by 16.0 per cent to $9.49 billion.
Victoria recorded just 3514 total approvals, its worst result since June 2013.
New South Wales recorded 53,298 approvals for the 2025 calendar year, an increase of 9254 or 21 per cent on 2024, while national results increased by 22,274 or 12.8 per cent to 195,731.
Industry observers said the weaker approvals figures would tighten future housing supply and complicate efforts to meet national housing demand if the trend continues.
Oxford Economics Australia lead economist Maree Kilroy said despite this result, “we are optimistic about the outlook for apartment development, which continues to come in on the upside”.
“Combined with strong enquiry leads for house and land packages and a higher overseas migration profile, there is continued momentum heading into 2026,” Kilroy said.
Urban Taskforce chief executive Tom Forrest said the National Housing Accord needs 240,000 units to be completed per year across the country with 76,000 per year needed in NSW.
“Approvals are the first step but even if they all resulted in new units being completed, we remain way behind the targets,” Forrest said.
He said the interest rate rise would flow through to undermine project feasibility, meaning that even fewer new homes will be built.
“Ironically, this will exacerbate the current undersupply and result in greater inflationary pressure through higher home prices and increases in rents,” Forrest said.
“The key message here for the nation’s treasurers is they must target their housing initiatives on stimulating housing supply and stop pump priming with handouts to new home buyers.
“Handouts are always politically popular but, without an increase in housing supply, they push prices up further.”
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