A single Reserve Bank of Australia (RBA) interest rate rise can suppress home ownership for more than a decade, with young Australians bearing the brunt of the impact, according to emerging research by University of Sydney economist Dr James Graham.
Using housing statistics and a detailed large-scale model, Dr Graham from the School of Economics is analysing how monetary policy affects Australians’ ability to buy and own homes over time.
“Early findings from the study show a standard 0.25 percentage point increase in interest rates leads to an immediate five percent decline in home purchases, and buying remains low for up to two years,” Dr Graham said.
“Home ownership rates also fall following a rate rise, declining 0.1 percentage points within the quarter following a rise and continuing to fall for four years before reaching their lowest point at 0.3 percentage points below baseline.
“A 0.3 percentage point fall in home ownership rate equates to tens of thousands fewer Australian households owning their home.”
Although home ownership eventually begins to recover, the modelling shows it does not return to its pre-rate-rise level for more than a decade.
“Even a single, modest interest rate rise can be extremely costly for households trying to enter the housing market,” Dr Graham said.
“These findings suggest the effects of monetary policy decisions on home ownership persist well beyond the immediate economic cycle.”
Many economists and financial markets expect the Reserve Bank of Australia to raise the official cash rate by 25 basis points, from 4.35 to 4.60, at its meeting on September 29, 2026. Photo credit: AAP/Susie Dodds
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LinkYounger Australians hit hardest
The emerging research is finding that monetary policy shocks skew home ownership by changing the distribution of household wealth, with younger Australians buying their first home disproportionately affected.
“What we’re seeing from the data is younger households with less income are hit hardest and experience the largest decline in home ownership following an interest rate rise,” Dr Graham said.
“Following a rise, incomes typically fall and households are forced to draw down savings that would otherwise have gone towards a house deposit, making future home ownership more difficult.
“Home ownership among middle-aged Australians falls several years later because many were unable to purchase a home when they were younger, whereas older households are largely insulated from the effects of monetary policy decisions.”
Younger Australians and first-home buyers are disproportionately affected by interest rate shocks, early findings show. Photo credit: REUTERS/Hollie Adams/AAP
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LinkInterest rate expectations influence home ownership
Early findings from the study also reveal household expectations about future interest rates impact home ownership outcomes by influencing saving and spending behaviours.
“People who are more pessimistic and believe interest rates will stay higher for longer tend to save more and are ultimately better positioned to purchase a home later,” Dr Graham said.
“By contrast, optimistic households expecting rates to quickly return to normal after a rise are more likely to run down their savings and find themselves locked out of the housing market when rates remain high.
“Because households make important financial decisions based on their expectations of future interest rates, it is essential the RBA provides clear and credible guidance on monetary policy.
“If households receive unclear or unrealistic signals about future interest rates, the consequences for home ownership can last for years," Dr Graham said.
Tight lending rules may be undermining home ownership
Another finding from the emerging research is that the effects of monetary policy are amplified by income-based mortgage borrowing constraints, Australian Prudential Regulation Authority (APRA) mortgage serviceability buffers and upfront stamp duty requirements.
When these barriers are removed from the modelling, the decline in home ownership following an interest rate rise is significantly smaller.
“Policymakers should reassess the consequences of tight macro prudential policies and high stamp duties, because these policies may be inadvertently contributing to the decline of home ownership in a world of high and rising interest rates,” Dr Graham said.
Hero photo: AAP/Susie Dodds
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