Australia’s emerging housing construction rebound could falter if interest rates rise again, with investor demand, now a key driver of new supply, particularly exposed to higher borrowing costs.
According to the Australian Financial Review, Consultancy firm Macromonitor forecasts housing starts will climb from a cyclical low of about 160,000 in FY2024 to 202,000 this year, before peaking at 225,000 by 2027. The recovery has been underpinned by strong population growth from migration and easing finance conditions following three interest rate cuts earlier this year.
Major developers say the impact of lower rates has been immediate. Mirvac’s head of development, Stuart Penklis, said historical trends show two rate cuts typically lift sales by about 40 per cent, a pattern the company has seen again during the current easing cycle.
However, Macromonitor’s projections assume interest rates remain on hold or fall slightly further, an assumption now under threat. Investment bank Citi has become the first major lender to tip a rate hike as early as February, following stronger-than-expected inflation and consumer spending data. Reserve Bank governor Michele Bullock has warned inflation risks have shifted “to the upside”.
Macromonitor economist Blake Willis cautioned that tighter monetary policy could unintentionally choke off housing supply just as construction activity begins to recover. He noted that around three-quarters of residential building downturns over the past 50 years have coincided with rising interest rates.
Investors are central to the current upswing. Macromonitor estimates they could account for 91,000 housing starts by FY27, nearly matching the combined total of first-home buyers and upgrader households. Any pullback from this cohort would materially affect development pipelines.
While Mirvac currently sells about a quarter of its homes to investors, Penklis said the market historically reacts more slowly to rate rises than cuts—though the outlook remains uncertain.
In Melbourne, developer Ashley Williams said higher rates would add pressure to a sector already grappling with elevated taxes and weak consumer confidence. Although apartment prices in Melbourne remain lower than in Sydney and Brisbane, he questioned whether affordability alone could sustain demand if borrowing costs increase.
One structural shift offering some support is the growing role of non-bank lenders in construction finance. As traditional banks retreat, alternative lenders are stepping in with more flexible funding terms, easing feasibility constraints and reducing pre-sale requirements. Williams said this shift has helped underpin projects such as his company’s $270 million Aria Melbourne development in Southbank.
As policymakers balance inflation control against housing supply targets, the next move on interest rates may prove decisive for whether Australia’s long-awaited construction recovery gathers momentum, or stalls once again.
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