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Investors brace for painful hit as cash rate nears 4.85%
A fifth rate hike tomorrow could put investor cash flows on the brink, squeeze borrowing power and send property values backwards, forcing landlords to rethink their portfolios as the market turns.
All four major banks have tipped a Melbourne Cup rate hike following higher-than-expected inflation, with the Reserve Bank of Australia (RBA) likely to lift the cash rate to 4.85 per cent, its highest level in 18 years and back to levels last seen in 2008.
PRD chief economist Dr Diaswati Mardiasmo said another increase would put further pressure on investors already contending with higher borrowing costs, reducing their purchasing power and slowing property demand and price growth.
“Higher borrowing costs would reduce borrowing capacity, potentially slowing buyer demand, moderating price growth, and reducing transaction activity in the housing market,” Mardiasmo told SPI.
“The greatest impact will be felt by highly leveraged investors and debt-reliant buyers, particularly those who entered the market with small equity contributions.”
Modelling showed that a 0.25 percentage point increase was expected to add $92 to the monthly repayments for a borrower with a $600,000 loan and 25 years remaining, taking the cumulative increase across the five hikes since February to $456 a month.
For investors, Mardiasmo said higher repayments could leave little room to absorb maintenance costs, vacancies and other unexpected expenses, while weaker demand could affect portfolio values.
Could higher rates trigger a wave of distressed sales?
Despite the added financial pressure, Mardiasmo said a broad wave of forced selling was unlikely, with mortgage buffers and accumulated equity expected to protect most homeowners.
She said prices were more likely to pull back as buyers lost borrowing power than through widespread distress among owners unable to meet their repayments.
“The price pullback is expected to be driven by reduced buyer purchasing power, rather than panic selling or widespread forced sales.”
The Reserve Bank’s October 2026 Financial Stability Review indicated that about 0.5 per cent of home loans were in negative equity, with modelling suggesting that even if property prices fell by 20 per cent, the share of loans in negative equity would remain below 1 per cent.
However, Mardiasmo said that signs of mortgage stress were already emerging in parts of the market.
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SQM Research data showed distressed listings had increased by nearly 30 per cent over the previous year to about 4,900 properties, with some homes taking longer to sell.
Mardiasmo expected listing volumes to rise modestly as owners reassessed their affordability, but said weakening buyer demand, rather than widespread panic selling, would remain the main drag on the market.
Investors urged to reassess their portfolios
While a wave of fire sales won’t happen anytime soon, Mardiasmo said investors should stress-test cash flows and review the financial performance of their existing properties before conditions become more challenging.
“Investors should stress-test cash flows, offload Class C and D assets, and pivot towards high-yield properties and strong regional locations.”
She said investors should assess older properties with deferred maintenance, lower-income tenant bases, and greater operational risks, particularly if rising costs are eroding returns.
“Investors could instead look to higher-yielding units and strong regional locations, where rental income could better offset rising financing costs.”
However, Mardiasmo cautioned against making decisions based solely on national market headlines, urging investors to assess the financial viability of their individual properties and their own capacity to manage further rate increases.
“Investors should focus on their own situation, rather than overreacting to the national market context, and assess the financial viability of their property and their personal position.”
She said investors should consider the risks and opportunities in their specific locations and seek advice from local property agents, mortgage specialists, accountants and lawyers before making decisions.
“Cutting through the noise by focusing on the person as an individual is crucial in a higher interest rate environment.”
Where investors could still find opportunities
While higher rates were expected to weigh on residential property, Mardiasmo said reduced competition could give financially secure investors greater negotiating power and access to more favourable purchase prices.
“Reduced competition could create acquisition opportunities and stronger negotiating leverage for financially secure investors.”
She said premium housing markets and areas reliant on leveraged buyers, including expensive top-tier suburbs and more affordable outer areas, could face weaker sales and sharper price declines as borrowing capacity contracts.
However, she said that markets with strong rental demand, low vacancy rates and solid population growth could remain attractive, particularly where rental income helped offset higher financing costs.
PRD data showed its time-to-buy a dwelling index had increased to 88.4 points in October, up from 80.4 points in September. Queensland, NSW, Victoria and Western Australia had also recorded monthly improvements.
Although the index remained below the 100-point mark, Mardiasmo said the improvement suggested buyers were still looking for opportunities despite continued caution.
Affordable city apartments, Darwin, and regional hubs were among the opportunities she identified, with rental stock shortages continuing to put upward pressure on rents in some locations.
“Lower competition and cheaper prices could create openings for investors with the financial capacity to act,” she said.
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