TERRY’S VIEW – Rate Rise No Surprise
The Reserve Bank of Australia announced an increase in interest rates this week.
Australians will pay higher interest rates because inflation is rising. The blame for that sits squarely on the shoulders of the Federal government, which has failed on housing policy, power prices and its own spending discipline.
Underlying inflation is now 3.4% - well above the Reserve Bank’s target and higher than forecast. Headline inflation is 3.8%.
This is not a one-off blip but a clear signal that inflation is becoming embedded again and rates are almost certain to lift more than twice this year.
Australians are told to blame global forces, supply chains or temporary shocks for rising inflation but the causes are much closer to home. Inflation is being driven by the costs households cannot escape: housing, electricity, services and food - exactly the areas where government policy has failed.
Housing costs are surging because governments have not increased supply in any meaningful way – it’s a major policy failure. When housing costs rise, inflation rises and interest rates follow.
It is that simple.
The Treasurer insists inflation is being driven by private-sector demand rather than government spending. That argument no longer stacks up. When government spending is expanding faster than the economy’s ability to supply goods, services and housing, it pushes prices higher.
The RBA bears its share of responsibility. Cutting rates three times last year now looks premature. It reignited demand at the wrong time, while unemployment was still low and the labour market tight.
The RBA is now boxed in. With inflation rising again and credibility on the line, it had little choice but to act.
January Price Lift
Housing values are continuing to rise, with new figures showing an increase in most of Australia’s major markets in January.
PropTrack data shows Australian home values rose by 0.2% in January, while Cotality puts the increase at 0.8%.
Both data houses agree that the monthly increase has resulted in solid growth over the past 12 months.
While the Perth market is below its peak, it still achieved the highest price growth among the capital city house markets in the past 12 months with medians up by 16.9% and units up by 21.1% according to PropTrack.
Senior Economist Angus Moore says the smaller capital cities are recording the strongest growth, while Sydney and Melbourne dwelling prices have softened in recent months.
Darwin’s median house price was up by 15.5%, followed by Adelaide up by 13.6% and Brisbane up by 13.1%, in the past 12 months.
Moore says unemployment rates remain very low and housing supply is limited which will help support ongoing demand and price growth.
Cotality research director, Tim Lawless, says the number of homes advertised for sale is 19% below the same time last year and 25% below the five-year average for this time of year.
He says affordable markets in particular are enjoying strong demand.
“This trend of stronger growth conditions at lower price points is supported by intense competition for more affordable houses,” he says.
“This is where first home buyers, investors and, progressively, mainstream demand is most concentrated.”
Cost of Building Rises Further
The cost of building a new home is continuing to rise, according to new data released by the Australian Bureau of Statistics.
Its latest Producer Price Index Report says detached house construction prices increased by 1.1% during the December 2025 quarter - the second highest quarterly increase in more than two years.
In the six years since December 2019, construction costs have increased by 37.5%.
The data shows that South Australia had the biggest increase in construction costs during the December quarter of 2.4%, followed by Queensland and Western Australia which are both up by 2%.
The December quarter increases are largely driven by rising costs for the raw materials used in manufactured construction products.
The cost of terracotta tiles is up by 5.9% while timber, board and joinery is up by 0.4%, which means fencing and gates are up by 4.2%.
Cement products are up by 1.6%, with concrete tiles in particular up by 2.7%.
December 2025 analysis by Altus Group, Head of Development Advisory, Niall McSweeney, says rising energy costs mean producing materials for housing construction is more expensive.
“When electricity prices rise, they don’t just hit household bills. They lift the embedded cost of construction materials,” he says.
Investment Opportunities Tighten
Competition for investment properties is tipped to intensify, with predictions that new development supply will remain lower than historic levels until at least 2030.
CBRE’s Pacific Real Estate Market Outlook 2026 says new development supply is forecast to remain 20% to 50% percent below historical levels for the rest of the decade.
Head of Pacific Research Sameer Chopra says with reduced property choice, the alternatives for investors and renters are increasingly limited. As a result, competition for existing assets is expected to intensify.
Chopra says the best opportunities for investors is to buy premium assets that will outperform on both rent and capital growth or buy existing assets, as the costs of construction are high and rents could take up to a decade to catch up.
He tips apartments on the Gold Coast and Perth, as likely to outperform as well as premium assets close to emerging infrastructure.
The report predicts that the future supply of apartments is likely to hover around 60,000 per year between 2026 and 2030, which is below demand for about 75,000 to 85,000 per year.
It expects median rents to grow by $180 per week (24%) between 2025 and 2030.
Apartment Approvals Surge
Apartment approvals have hit a five-year high with new analysis showing the sector makes up a quarter of new home approvals.
Analysis from OurTop10.com.au South Australia is leading the apartment trend with annual growth in approvals of 171%, followed by New South Wales (62%), Queensland (48%), Western Australia (36%) and Victoria (27%).
Smaller apartment buildings are the current favourite, with an 86% increase in approvals for three-storey apartment buildings in the past year.
Although apartment approvals are rising, the figures remain below levels from a decade ago. ABS commencements data shows work began on 18,996 apartments or townhouses in the September 2025 quarter.
New property value data shows that apartments offer a much more affordable option. Most of Australia’s capital city apartment markets had a median of about two-thirds that of the house median.
The difference between the median house and median unit value in Sydney is more than $695,000, in Melbourne it is $350,000, Brisbane is $325,000, Adelaide is $305,000 and Perth is $304,000.
Apartment markets are offering much stronger yields than house markets according to Cotality data for the 12 months to February 2026.
Yields in capital city apartment markets sit in the 4% to 5% range, led by Darwin with a yield of 7.3%. While Perth is 4.9% and both Melbourne and Hobart are 4.8%.
