Global instability, inflation and interest rates: what it could mean for Australia’s housing market

Global uncertainty and rising inflation risks are once again shaping Australia’s interest rate outlook and could influence the direction of the property market.

These themes were front of mind at Commonwealth Bank’s Premier Banking Property Pulse event in Sydney, where around 300 customers gathered to hear insights on the economy, interest rates and the outlook for housing.

Economists say global events, including conflict in the Middle East and disruptions to oil supply routes, are putting fresh upward pressure on inflation in Australia.

Higher oil prices tend to push up costs across the economy, from transport to energy which can feed through to consumer prices.

Inflation in Australia is already running above the Reserve Bank of Australia’s two to three per cent target band, meaning global shocks could complicate the RBA’s path back to price stability.

Speaking ahead of the event, CommBank Economist Harry Ottley said the global backdrop is creating a fast-changing economy.

“Obviously, the environment is very fluid at the moment with what is going on around the world,” Mr Ottley said.

He said strong economic conditions at home mean the RBA may still need to act if inflation pressures persist.

“We think the RBA will have to increase interest rates this year again. Inflation in Australia is a little bit too high and we’ve got an economy that’s actually performing quite well.”

Why inflation pressures matter for interest rates

Australia’s economy strengthened through 2025, supported by rising household incomes, stronger consumer spending and improving business conditions.

Consumer spending alone accounts for more than half of Australia’s economic activity, making it a key driver of growth.

But the stronger economy has collided with supply constraints.

Low productivity growth and a tight labour market mean businesses have limited capacity to absorb stronger demand without raising prices.

As a result, economists say interest rates may need to go higher and stay there for longer to ensure inflation returns sustainably to the RBA’s target range.

Mr Ottley said these conditions are an important part of the economic story.

“The improvement in the economy is hitting up against these capacity constraints and unfortunately that does mean high interest rates,” he said.

Higher borrowing costs have already had a noticeable impact on housing markets across the country.

Sydney housing market showing signs of moderation

While national home values have rebounded strongly in recent years, the pace of growth is now slowing in some markets.

Cotality’s Asia Pacific Head of Research, Tim Lawless said the housing market is beginning to show early signs of cooling.

“Clearly the market’s starting to slow down a little bit, a few cracks emerging on the back of affordability and serviceability challenges,” Mr Lawless said.

He added rising interest rates have played a key role.

Recent data shows Sydney and Melbourne home values have edged lower in recent months, while markets such as Perth, Brisbane and Adelaide have continued to record stronger growth.

Despite these pressures, demand in Sydney remains relatively resilient.

“We are seeing demand in Sydney has actually held pretty strong, it’s above average in the face of affordability challenges,” Mr Lawless said.

Supply and demand still shaping the market

Another factor influencing the housing outlook is the balance between supply and demand.

Mr Lawless said early signs suggest more homes are coming onto the market with listing numbers starting to increase.

However, housing supply constraints are expected to continue for some time.

“We know that construction activity is still going to be pretty hard through 2026,” Mr Lawless said.

“That means we’ll probably end the year with an ongoing supply-demand imbalance, but nowhere near as far apart as what we’ve been seeing over the past couple of years.”

What comes next for rates and housing?

The outlook for interest rates will depend on how inflation evolves in the coming months.

If global energy shocks push inflation higher, the RBA may face additional pressure to keep rates elevated or raise them further.

That would likely weigh on housing activity by increasing borrowing costs and further stretching affordability.

At the same time, Australia’s underlying economic strength, including rising incomes and solid employment, continues to support housing demand.

For property buyers and homeowners, the key takeaway is that the market is shifting into a more balanced phase after several years of strong price growth.