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RBA hike: What does it mean for investors?
For its initial meeting of 2026, the Reserve Bank of Australia (RBA) has decided to hike the cash rate by 0.25 percentage points, for the first time since November 2023, to 3.85 per cent.
The RBA’s decision followed higher-than-anticipated inflation, rising rents, insurance and energy costs, and a strong labour market, leaving little room to ease policy.
According to Cotality’s head of research, Gerard Burg, the rate hike will slightly dampen buyers’ confidence as borrowing capacity decreases, thereby cutting the momentum of dwelling price growth.
Burg said that while previous rate cuts drove a 9 per cent surge in house prices, adding around $75K to the median, the recent hike will likely ease buyer demand.
“The hike will reduce the borrowing capacity of buyers, with a median income household in Australia losing around $18,000 from their mortgage limit.”
“This could push an increasing number of buyers from mid-tier properties to lower quartile ones, leading to higher demand on the urban fringes and regional markets close to capital cities.”
According to InvestorKit CEO and head of research Arjun Paliwal, the RBA’s hike move reinforced that borrowing conditions will stay challenging well into 2026.
“A 25-basis-point rise can add roughly $90–$150 per month in repayments depending on loan balance, so maintaining financial buffers and reviewing debt structures remains critical,” Paliwal told SPI.
Paliwal said that in the short term, the rate hike will likely soften buyer sentiment, as many purchasers who had been waiting for the RBA’s decision may now delay their return to the market.
However, he said that the extremely tight housing supply, low rental vacancy rates of 1.2–1.4 per cent, and strong population growth, fuelled by 306,000 net overseas migrants in the year to June 2025, will continue to underpin investor activity and place a structural floor under demand.
“From a strategy perspective, this environment rewards selective investing and disciplined positioning: prioritising strong rental markets, and long-term fundamentals over short-term momentum.”
He said that while another hike may delay certain markets, it can also create opportunities for prepared buyers with pre-approval and cash-flow resilience to negotiate in a weaker sentiment window.
“If this move proves close to the peak of the cycle, markets could stabilise quickly once certainty returns, setting up the next recovery phase in some of the weaker markets later in 2026.”
“The longer-term outlook remains supported by supply shortages, population growth, and sustained rental demand, even as higher rates shape a more selective and strategic investment landscape.”
Similarly, Reward Homes CEO Ratu Knight said the rate rise will slightly slow investor activity, particularly for those who are highly leveraged.
He said that as borrowing costs rise, investors naturally become more yield-focused, seeking assets that can better cover higher repayments, pushing them toward higher-yielding properties, regional markets or commercial ventures.
“We may also see some investors attempt to increase rents to offset higher holding costs, which puts further pressure on renters and worsens affordability challenges,” Knight told SPI.
“In addition, competition from investors moving into more affordable or regional areas can make it harder for first home buyers to enter those same markets.”
While some investors will turn to more affordable markets, Knight said the rate hike will weigh on construction, as it will raise building costs while borrowing power shrinks.
“If buyers believe further rate hikes are coming, many will pause, reassess affordability, and run more conservative forecasts. This can lead to a drop in new-build demand as buyers default to existing homes.”
“At the same time, rising rates often coincide with increases in the cost of goods and materials, which places upward pressure on building costs. Combined with lower buyer confidence, this creates hesitation in the market.”
According to Domain’s chief of research and economics, Dr Nicola Powell, the rate hike showed how quickly expectations have shifted, from talk of rate cuts just months ago to the reality that interest rates may remain high with its consequences on the market.
“Supply constraints will continue to underpin prices, so we’re not talking about a sharp correction. But higher borrowing costs do slow things down,” Powell said.
“We expect price growth to moderate through 2026, particularly in markets like Sydney and Melbourne, where buyers are more sensitive to interest rate changes.
On the commercial front, Knight Frank chief economist Ben Burston said the RBA’s rate hike won’t derail the sectors’ recovery, but underscored income growth as key to driving early-cycle returns.
“The increase in rates will act to slow down nascent signs of yield compression, but the outlook for property returns remains on a solid footing given limited supply pipelines across multiple sectors, including office, industrial and living sectors.”
“This will act to drive rental growth over the medium term, and we are already seeing evidence of this in the office market where strong growth is now being recorded in Sydney, Brisbane and Adelaide, with other cities set to follow,” Burston concluded.
