What would the property market look like with a 4.85% cash rate?

According to PRD chief economist Dr Diaswasti Mardiasmo, the bank’s new prediction was not surprising, as rising inflation and global tensions, especially the Middle East conflict, have accelerated and increased expected rate hikes, delaying any relief until mid-to-late 2027.

“The last time Australia had a 4.85 per cent cash rate was in around 2008/2009, circa global financial crisis (GFC), which was quite a while ago, so many of us would not have remembered or experienced this,” Mardiasmo told SPI.

“Despite that, it would be more the case of having five interest rate hikes within a year, as opposed to the actual percentage figure, that would have the impact.

“I think many people still have a very vivid memory of back-to-back cash rate hikes in 2022 – our saving grace right now is that the Reserve Bank of Australia (RBA) meets eight times a year, not 11 times like in 2022. So we have a bit more ‘breathing space’ in terms of adjusting our budgets.”

Property prices

Similar to every cash hike, Mardiasmo said property prices would be affected differently across markets, with some dwellings experiencing a slight downturn while others might see a bigger drop.

“In the short term, like in any situation where there are sudden hikes, we may see prices slowing down; however, not to the level of a crash – for example, property prices dropping by half.”

“We might see prices drop by 5–15 per cent, depending on location and the type of stock available, such as blue-chip suburbs, because they cost more to buy and maintain, usually feel it first.”

She said weakening auction clearance rates have already signalled downturns in Sydney and Melbourne, while tight supply in Brisbane, Adelaide, Perth, and regional markets has been capping growth rather than declines.

In the medium and long term, Mardiasmo said a 4.85 per cent or more would depend most on the resolution of the Middle East conflict.

She said a prolonged conflict could trigger cascading impacts, including fuel shortages, soaring business costs, supply disruptions, and job losses, further worsening economic pain.

“At this stage, a financial crisis and recession are likely, further dampening our property market, and if the cash rate continues to increase, we will see a larger price downturn.”

“However, if this is not the case, if the conflict ends and our economy has held resilient for the rest of 2026, then we would be in the recovery and rebuild phase, and our property prices would follow that cycle too.”

If the Middle East conflict remains ongoing, Mardiasmo said the chaos it would leave behind in the next five years or more would impact the recovery and rebuilding phase.

“That said, history has proven that our property market has continued to prove to be resilient. And that despite shocks – GFC, COVID-19 – it comes out the other end and recovers pretty quickly.

“This is mainly because housing is a primary need – everyone will always need houses and put it first on the list. Granted, we have not been in this situation where an international geopolitical risk has become so acute, so it really depends on what carnage it leaves and the required recovery and rebuild process.”

Market sentiment

In addition to its impact on property prices, a 4.85 per cent cash rate would also dampen market sentiment nationwide.

Mardiasmo said that buyers would definitely “think twice” before making a purchase to ensure they get the best property and the best financial setup possible.

She said that buyer psychology would shift from fight-or-flight, with the extent of the situation depending on whether they were financially ready, had a stable job, and could absorb further rate hikes.

“It creates fear and uncertainty, of course, and the only thing that can beat that is feeling like they have ‘dot your i and crossed your t’ – which suggests a more cautious customer and longer decision-making time.”

While the cash rate would weigh on demand, Mardiasmo said supply is also under pressure, with rising costs making it harder to deliver new stock.

“In a way, this creates equilibrium. Yes, demand might dampen, but supply delivery is hindered as well. So in the economic seesaw of what influences property prices, both sides of the equation are decreasing.”

Buying or selling?

While market sentiment can dampen, Mardiadmo said that some buyer would be best positioned to take advantage of a downturn and get the best for their bucks.

She said that buyers need to take into account that five cash rate hikes could slash borrowing capacity by around $60,000–65,000 for a single-income household and $100,000–105,000 for a dual-income couple, significantly reducing what buyers could afford to offer.

“Buying now really depends on three things: do you really need a new house or apartment now? Are you financially mature and secure in your job? Is there low or ample stock in your market?

“If the answer is yes, there is still a possibility of a good deal to be made, at the current cash rate/interest rate on a fixed rate home loan for the next 1–3 years, depending on what financial offer package is accessible.”

She said that when finances were uncertain, there was no urgency to buy, or stock was plentiful, buyers were often better off waiting, as timing the market was risky, and many later regretted either buying at the wrong time or waiting too long.

“At the end of the day – at the moment, nothing is quite guaranteed.”

“So, as always, property buying and the right time to do it will always be an individual choice. It’s not ‘is it the right time to buy because the market says so’, it's ‘is it the right time to buy for me’.”

Yet, she said that for well-positioned investors, the possibility of a property downturn would create affordability-related opportunities, especially for those who can lock in a competitive interest rate and whose borrowing power is not too affected.

If anything, Mardiasmo said that past shocks like the GFC, COVID-19, and natural disasters showed the market’s resilience, driven by housing as a basic need and an ongoing supply-demand imbalance.

For sellers, she said success would come down to sharp pricing, strong marketing, quality presentation, and choosing an agent with deep local knowledge and a wide buyer network.

Like the buy-or-hold decision, Mardisamo said that selling versus holding depends on multiple factors, and even with softer demand, strong undersupply can still support profits, especially if long-term gains outweigh short-term corrections.

She said the best gauge would be average vendor discount data, combined with buyer activity at inspections and recent comparable sales, to help sellers make informed decisions.

“Of course, this also depends on how long the owner has held the property.”

“Overall, there are quite a few variables to think about on selling decisions – and similar to buying decisions, is now the right time for me to sell as opposed to is now the right market to sell.”

While some would be ‘winning’ in a higher cash environment, Mardiasmo said they would still be pain for most.

“We will all feel the pain – whether it’s home loan repayments or cost of living, but there will be certain cohorts that are more financially vulnerable and will feel this more.”

She said that first home buyers on the 5 per cent scheme with high debt, those unable to refinance into lower fixed rates and stuck on variable with their current lender, and anyone facing potential job loss would be particularly vulnerable.

“Investors will most likely feel a lot of pain, especially if they have just locked into a 12-month lease or still have many more months to go.”

“It will then be a question of financial viability, and if they would be able to secure a higher rent income in the next lease or not,” she concluded.

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• Cash rate
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• Property market

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