Rate hikes will hit Aussie home building ‘very hard’, builders warn

Builders say the recent rise in interest rates will make building new homes more expensive and delay the delivery of much-needed housing.

The Reserve Bank of Australia raised interest rates by 25 basis points to 4.1% on Tuesday, as it tries to combat rising inflation in the region while dealing with the impact of rising oil costs due to the Middle East conflict.

It is the second rate increase in as many months, which will affect many families who pocketed the money from the three interest rate cuts that were issued last year.

Most homeowners will see their payments rise, but homebuyers looking to build a new home will face higher costs, housing groups say.

Master Builders Australia has warned that the price hike will “hit building and construction very hard”, which comes on top of rising fuel prices and supply chain disruptions that will drive up construction costs.

“Today’s rate hikes make investment in new homes less attractive, add more financial pressure, particularly to high-density projects, and make it harder to reach the National Housing Accord targets,” said Master Builders Australia chief executive Denita Wawn.

“Constructors across the country have been hit with higher fuel and product charges due to the conflict in the Middle East, and rising costs of goods including transportation and concrete.”

Mrs. Wawn said that the purchase of goods such as tiles and plastic has also been disrupted, which will delay the supply of new houses.

High prices and disruption of supply chains can threaten the performance of construction companies due to the general practice of fixed-price contracting, which has been seen in the years since the start of the pandemic when construction companies have increased debts.

The average cost of building a house in Australia was $443,422 as of December 2024, according to the latest Australian Bureau of Statistics data, however the final cost depends on location, size and other factors.

Major builders estimate that the cost of building a new home is 47% higher than before the pandemic.

Master Builders Australia chief executive Denita Wawn says rising prices will make investment in new homes unattractive. Image: Provided

---

Housing activity has been picking up, but there are fears that recent interest rate hikes and other factors will slow momentum going forward.

There were 14,564 building permits in January, down 15.7% compared to the same period last year, according to the latest ABS figures.

However, a longer-term view of the data reveals that building approval activity has improved, with analysis by realestate.com.au showing building approvals were up 9.2% in the year to January, compared to the previous 12 months.

The number of new home starts increased by 6.6% in the September 2025 quarter, and was 11.6% higher than the same period last year.

Tim Reardon, chief economist at the Housing Industry Association, said higher interest rates are driving up the cost of delivering new homes and making it more difficult to finance new housing projects.

The Housing Industry Association’s chief economist, Tim Reardon, says governments will need to do more to increase the supply of new homes. Photo: Tertius Pickard.

---

“As a result, this decision is likely to reduce the number of new houses that start to be built at the same time that Australia needs more houses to be built,” he said.

“When fewer houses are built, competition for existing houses increases, driving up prices and rents and adding to housing prices.”

Mr Reardon said governments needed to do more to increase the supply of new homes if they wanted to improve housing affordability.

Australia’s median home price rose 9.1% to $897,000 in the year to February, adding almost $90,000 to the median home price, according to the latest PropTrack Home Price Index.

While Australia’s housing shortage will continue to put pressure on house prices, recent price increases will reduce the borrowing power of many home buyers.

REA Group chief economist Eleanor Creagh said rising rates would limit the improvement in borrowing capacity following the 2025 rate cut.

“Higher mortgage rates will add to consumer solvency constraints and will slow the pace of price growth from the strong gains recorded in 2025,” he said.

“National house prices have risen strongly over the past year. However, affordability remains stretched, and further tightening of monetary policy will slow the pace of price increases in 2026.”