What will happen to property prices if interest rates keep rising?

Australians who own property have been keeping a keen eye on one number in particular this year, namely the Reserve Bank of Australia’s (RBA) cash rate that determines whether borrower interest rates will rise or fall.

After a period of falling interest rates and renewed optimism in the property market, the RBA has seemingly changed direction.

Four rate increases during 2026 have taken the cash rate from 3.60 per cent at the beginning of the year to 4.60 per cent in October, which marks its highest level since 2011. Economists are currently split on whether there will be a fifth rate rise this year.

But what’s important to investors and homeowners is how the property market has responded to these interest rate movements.

National dwelling values have now fallen for six consecutive months, with Cotality recording a 1.1 per cent decline in September alone. National values are now 5.2 per cent below their March 2026 peak.

What will happen if rates continue rising?

The obvious answer is that property prices are likely to face further downward pressure, but for investors, the more interesting question is not simply how far prices might fall.

An important question to consider is what is likely to happen next?

History shows that interest rates and property prices are closely connected and this relationship is neither immediate nor perfectly predictable.

We can look back at how the market has changed through 2026 so far, because the four rate rises this year have already impacted the property markets.

The RBA began 2026 with the cash rate at 3.60 per cent, then increased the rate by 25 basis points in February, another 25 basis points in March and another 25 in May. After holding in June and August, the RBA delivered another 25-basis-point increase in September, taking the cash rate to 4.60 per cent.

This totals 100 basis point increases in the first nine months of the year and if you’re a highly leveraged property investor, that can be a significant hit to cashflow.

For mortgagees, these rate increases can cause a lot of stress on the household budget when taking into consideration the rising costs of living occurring simultaneous to these rate rises.

Higher interest rates reduce borrowing capacity (serviceability), which will increase mortgage repayments and change the mathematics (and possibly the viability) of an investment.

Interest rates can also affect buyer sentiment, because owner-occupiers and investors have less capacity to borrow, and can be an indicator of the health of the markets.

The RBA acknowledges that higher rates have contributed to lower housing credit demand and falling property prices. It also notes that investor credit growth has moderated and that investor activity can have a particularly strong influence on housing-price dynamics.

The reason, however, that the RBA increases and decreases the cash rate isn’t due to the state of the property market but rather curbing the country’s inflation rate.

How the capital cities have performed in 2026

The property downturn began in the more expensive markets before spreading to the previously stronger-performing capitals.

By September, Sydney and Melbourne were experiencing some of the most substantial declines, while Brisbane, Adelaide and Perth also moved into negative territory.

Cotality’s September figures showed monthly falls of 1.4 per cent in Sydney, 1.5 per cent in Brisbane, 1.3 per cent in Adelaide, 1.2 per cent in Perth and 0.7 per cent in Melbourne. Darwin was the notable exception.

Sydney and Melbourne had already been struggling with affordability and high property prices when the latest rate increases arrived.

Brisbane, Adelaide and Perth entered 2026 from much stronger positions following several years of substantial growth, so their correction has occurred later.

September market performance showed that the most expensive properties have been hit hardest. The upper-quartile house values are more than 10 per cent below their peaks in both Sydney and Melbourne.

Interest-rate increases don’t affect every property equally as market dynamics are varied.

Highly priced markets with highly leveraged buyers can be more sensitive to changes in borrowing capacity, while more affordable markets can remain comparatively resilient for longer.

It is the lower-priced properties that can benefit from their relative affordability with apartments and duplexes an option for buyers when the affordability of houses is out of reach.

What happens if rates rise?

If the RBA were to raise the cash rate to 4.85 per cent, borrowing costs would increase again and borrowing capacity would be squeezed further. A larger 50 basis point lift would take the cash rate to 5.10 per cent. Neither scenario would be good news for short-term property prices and the likely immediate effect would be weaker buyer demand, fewer transactions and greater negotiating power for buyers.

On the flip side, this creates an opportunity to invest when prices are declining and the investors who will come out on top will be the ones who can afford to hold the properties long-term.

Looking at the supply side, some highly leveraged owners could become more motivated to sell, particularly if they have limited cash buffers.

It is important not to assume that a further rise automatically translates into an equivalent percentage fall in property prices.

It doesn't work that way. The RBA has previously examined the relationship between interest rates and housing prices and found the impact depends not only on the size of an interest rate change but also on how long the higher rates remain in place.

It’s modelling suggested a sustained 200-basis-point increase could eventually result in housing prices around 30 per cent lower than they otherwise would have been but also stressed that housing prices adjust relatively slowly and that other factors such as population growth and housing supply matter enormously.

There is often an assumption that when the RBA increases rates, property prices will immediately fall but the reality is that property prices will always lag in response to interest rate announcements.

When rates change, borrowers will take time to adjust their spending, fixed-rate loans roll off at different times, banks reassess serviceability, buyers change their expectations, sellers gradually become more realistic, and eventually the reduced borrowing capacity filters through into transaction prices. This all takes some time to adjust.

If the RBA stops increasing rates, this does not mean the current downturn would necessarily stall, because the property market may still be absorbing the earlier rate increases.

History tells a valuable story

Property values move in cycles, so we know Australia has been through this before.

During the enormous monetary tightening cycle of the late 1980s, interest rates reached extraordinary levels.

The cash rate was around 18 per cent at the peak in 1989. Property prices began falling as the economy slowed and the property boom ended but what happened next is particularly interesting.

By early 1990, the RBA recognised that the economic environment had changed and began reducing rates. Cash rates fell from around 18 per cent in January 1990 to around 15 per cent by early April, with further reductions continuing through that and the following year.

The lesson isn’t that today’s market will repeat 1990. It won’t. Today’s debt levels, financial system and inflation environment are very different. The lesson is that interest rate cycles will eventually turn. The RBA raises rates to slow demand and inflation and when the economy slows sufficiently, the rationale for those high rates changes.

We saw this same mechanism occur after 2022. The most modern example is the 2022-23 rate cycle.

When the RBA began raising rates from emergency pandemic settings, and housing prices fell sharply and by early 2023, the RBA reported that national housing prices had fallen around 8 per cent from their April 2022 peak.

Sydney was down about 14 per cent from its peak, Melbourne 9 per cent and Brisbane 10 per cent. When observing the outcomes we can notice that something interesting happened. The market eventually stabilised.

By May 2023, the RBA reported that national housing prices had stabilised after the approximately 8 per cent decline, supported by population growth, limited housing supply and changes in expectations around interest rates and by August, housing prices had begun rising again.

The RBA noted that the rebound was broadly based across capital cities and regional markets, despite interest rates remaining high.

What could another rate rise mean for each capital?

If rates rise again, Sydney and Melbourne are likely to remain particularly vulnerable because affordability is already stretched and their markets have experienced substantial declines.

We would expect Brisbane, Adelaide and Perth to also experience further falls because their downturns began later.

Darwin provides an excellent example of why blanket predictions are dangerous. While most capitals experienced declining values in September, Darwin was the only capital to record monthly growth, recording annual growth of 12 per cent. But this doesn’t mean Darwin makes a safe or good investment. Different markets can be at completely different stages of the cycle at the same time.

This is where the conversation needs to move beyond interest rates. An investor’s biggest mistake would be to build an entire investment strategy around predicting what the RBA will do next.

Despite what the experts say, nobody actually knows whether the next move will be another increase, a hold or a cut. A savvy investor will base their strategy around buying property that can withstand different interest-rate environments.

Buying quality properties rather than simply chasing the cheapest market or suburb, or areas that have seen recent growth, will reap the benefits in the long term.