Economic snapshot. The economic narrative has completely changed over the past six months, with the data suggesting that the economy is improving with more momentum than most (including the RBA) expected only a few months ago. If we think back to August 2025, confidence was building that the battle against inflation had more or less been won, and despite a recovery in household incomes, consumer spending and business conditions remained subdued. We entered FY26 with the hope that the recovery in household financial conditions would support a lift in business activity in the new year, but there were few clear signs in the data at that point. Since then, the run of data has gone from strength to strength. Households, after pulling back from discretionary spending, have bounced back. Business conditions and profitability have improved back in line with long-run levels. Meanwhile, the housing market gradually built momentum in 2025, with capital city residential property prices growing by 8.3%. But with this momentum comes the question of capacity, and whether demand in the economy still exceeds supply. Inflation data in January confirmed this is the case, accelerating through the second half of last year. Annual core inflation in 2025 was 3.4%. Inflation is moving away from the RBA’s 2.5% long-term goal, and their February forecasts show it reaching 3.7% in June 2026, well above where they had forecast in August last year. This is why the RBA has commenced hiking and why the market expects more to come. With private sector momentum building and no clear path for inflation to return to 2.5%, we expect the RBA to unwind the 75bp of cuts delivered in 2025 throughout 2026. This started at their February Senior Economist at Judo Bank Matt De Pasquale meeting, and will likely be continued in May and August. The risk however is for a greater and quicker increase in the cash rate. How these rate changes are likely to impact the property market is open to debate, particularly given the structural shortage of housing in Australia. Our expectation is that residential property prices will broadly remain unchanged this year. Certain markets will likely see more pronounced decline, driven from a rapid slowdown in investor activity from higher funding costs and tighter credit conditions. This would likely play out in the states and territories that have experienced elevated investor activity over the past year or so (NT, WA, SA & QLD). Investors are historically more sensitive to changes in mortgage rates and tend to react more quickly than owner-occupiers. Owner-occupier stress stemming from these rate rises is likely to be less pronounced than the sharp nominal tightening period of 2022–23. Real household incomes have improved, and households, on average, continued making extra mortgage repayments during the 2025 easing cycle. Overall softness in property price growth from these predicted rate rises however will likely be limited by both ongoing strength in labour markets and the significant dwelling shortfall in supply with approvals continuing to fall short of National Housing Accord targets. Source:Bloomberg, RBA, Judo Bank www.judo.bank
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