The latest inflation figures, released on 28 October 2026, have strengthened the case for another increase in interest rates. For Sydney property buyers, the question is what that might mean for prices.
On Wednesday, the Australian Bureau of Statistics reported that annual headline inflation had risen to 4.3% in September, up from 4.0% in August. More importantly, underlying inflation remains above the RBA’s target range. Annual trimmed mean inflation rose to 3.6% in September, up from a revised 3.5% in August, while quarterly trimmed mean inflation increased by 1.0% in the September quarter.
The figures have strengthened the case for another rate increase when the RBA meets on Melbourne Cup day, Tuesday 3 November.
But there is a bigger question here.
If interest rates rise again, does that necessarily mean Sydney property prices will fall further?
Having spent the past two weeks in Japan, I found myself thinking about this question from a slightly different perspective.
Japan has experienced one of the most extraordinary property booms in modern history, followed by a prolonged period of falling land values. More recently, parts of its residential market have experienced renewed price growth.
The Japanese experience is not a blueprint for Sydney. Our economies, demographics, lending systems and property markets are different.
Nevertheless, its history illustrates something worth understanding: interest rates matter enormously, but they do not tell the whole story about property prices.
1. The immediate question: will the RBA raise rates again?
The September inflation figures were not particularly encouraging for anyone hoping interest rates had peaked.
Annual headline inflation and annual trimmed mean inflation both increased.
The quarterly figures also deserve attention. The CPI increased by 1.3% during the September quarter, while quarterly trimmed mean inflation rose by 1.0%. The latter is equivalent to an annualised rate of approximately 4.1% if sustained over four quarters, well above the RBA’s 2% to 3% inflation target.
There is, however, an important distinction between the headline figures and the underlying trend.
Higher fuel prices and holiday travel contributed to the September increase. Housing costs also remain a significant source of inflation, with the housing component of the CPI rising by 5.2% over the year.
This is important because the RBA needs to determine whether inflation is being driven by temporary factors or whether broader price pressures are proving more persistent.
The latest results do not make another rate rise inevitable, but they have made it harder to dismiss the possibility. Economists and financial markets have consequently increased their attention on the November decision.
The outlook beyond November is less certain. Commonwealth Bank now expects another 0.25 percentage point increase next week, taking the cash rate to 4.85%, followed by a pause while the RBA assesses the effect of higher rates on the economy.
NAB has also moved to forecasting a November increase. Beyond that, the path will depend on whether inflation begins to ease or proves more persistent than expected. Further increases remain a risk, but they are not a foregone conclusion. For buyers, the sensible approach is to consider whether their finances could withstand another increase beyond November, rather than assuming next week’s decision will be the last.
My view is that buyers should prepare for the likelihood of another increase next week without treating it as a certainty whilst also being ready for further rate rises next year.
For a household with a $700,000 mortgage, a 0.25 percentage point increase would add approximately $107 a month to repayments, depending on the loan and repayment structure.
That may be manageable for some households. For others, particularly those already stretching their borrowing capacity to secure a property, it could be enough to change what they can afford.
Higher rates affect buyers differently. Some will reduce their budgets, some will postpone their purchases and others will continue searching because their financial position allows them to do so.
That difference becomes particularly important when we consider what happens to property prices.
2. Japan’s property bubble: what happens when prices become detached from reality?
During the 1980s, Japan experienced an extraordinary asset-price boom.
Easy credit, speculative investment and widespread confidence that land values would continue rising helped drive property prices to exceptional levels.
Land became more than an asset to own or a place to live. In parts of the market, it was treated as an investment whose value could be expected to rise indefinitely.
The Bank of Japan tightened monetary policy towards the end of the decade. Credit conditions became more restrictive, speculative activity came under pressure and the assumptions supporting the boom became increasingly difficult to sustain.
The bubble burst around the beginning of the 1990s.
The subsequent decline in land and property values was severe and prolonged. Banks were left with substantial bad loans, balance sheets deteriorated and the wider economy endured years of stagnation.
It is tempting to simplify this history into a straightforward lesson: interest rates rose, so property prices collapsed.
That misses the more important point.
The Japanese property crash was not simply the consequence of a rate rise. It was the unwinding of a much larger financial and economic imbalance.
Prices had become vulnerable because of excessive borrowing, speculative behaviour and expectations that values would continue rising. Tighter monetary policy exposed those vulnerabilities.
Sydney property owners might be reassured by these distinctions.
Higher interest rates can reduce borrowing capacity and place downward pressure on prices. But the scale of the impact depends on the conditions that existed before rates increased, including how heavily buyers have borrowed, how far prices have moved ahead of fundamentals and how much demand remains in the market.
A market supported by sustainable household finances and genuine demand is not necessarily going to respond in the same way as one driven by speculative excess.
Japan demonstrates what can happen when the foundations supporting property prices become seriously distorted. It does not establish that every period of rising interest rates must end in a property crash.
3. Why parts of Japan’s property market are rising again
There is another side to Japan’s story.
After decades of exceptionally low interest rates and subdued inflation, Japan is entering a different economic environment. The Bank of Japan raised its policy rate to 1.25% in September, its highest level in 31 years.
That is a significant change for Japan, although borrowing costs remain relatively low by Australian standards.
Yet property prices in parts of Tokyo have risen substantially in recent years. Why has that happened despite the gradual increase in interest rates?
Interest rates are only one influence on property prices. The supply of desirable housing, construction costs, investment demand and the concentration of demand in particular locations can also influence what buyers are prepared to pay.
In sought-after parts of Tokyo, limited availability of new apartments and strong demand for particular properties can support prices even when financing becomes more expensive.
That does not mean higher rates have no effect. Prices might have risen further if borrowing costs had remained lower. Nor does growth in central Tokyo establish that every Japanese property market is performing well.
The point is that a property market is not a single, uniform asset whose prices move in response to interest rates alone.
Sydney is no different.
4. What does this mean for Sydney property prices?
There are several competing forces at work in our market, and they do not always pull in the same direction.
The first is borrowing capacity.
When interest rates rise, buyers generally cannot borrow as much for the same income and repayment commitment. Some reduce their budgets, while others withdraw from the market altogether.
That can reduce competition, particularly for properties attracting highly leveraged buyers. Vendors may need to reconsider their price expectations, and properties can take longer to sell.
The second force is supply.
If fewer suitable properties are available, the remaining stock can still attract strong competition. This is especially relevant where buyers have specific requirements and there are relatively few homes that satisfy them.
Consider a well-located family home with an attractive floor plan, good land content and limited competition from comparable properties. Its market performance may differ considerably from that of an apartment in a building with numerous similar properties available for sale.
The third factor is the property itself.
Location, scarcity, condition, functionality and competing supply all influence demand. Properties with significant defects, compromised layouts or other disadvantages may become harder to sell when buyers have more choice and less urgency.
Finally, there is the broader economic environment.
Employment, population growth, household finances, credit availability and confidence influence how buyers respond to higher interest rates.
These factors help explain why a change in monetary policy can have different consequences across suburbs, property types and price brackets.
A further rate increase would place additional pressure on borrowing capacity. It would not, on its own, tell us whether Sydney prices would fall by 2%, 5% or remain broadly unchanged.
Anyone making a confident prediction about the precise effect of the next rate decision is assuming a degree of certainty that simply does not exist.
5. What I would take from Japan as a buyer’s agent
After 17 years working in Sydney property, I have seen how quickly buyer sentiment can change.
When confidence is high, buyers worry about missing out on further price increases. When conditions weaken, many become reluctant to commit because they fear prices will fall further.
Both reactions are understandable. Neither necessarily produces a good purchasing decision.
Japan reinforces three principles that I believe are particularly relevant in the current environment.
Firstly, do not pay a price that depends on further capital growth to make sense.
Capital growth is important, but it is not guaranteed. The purchase price needs to be supported by comparable sales, the property’s characteristics and the quality of its location.
Buying an overpriced property with the expectation that the market will eventually justify the price is a very different proposition from purchasing an asset at a defensible price with a long-term ownership horizon.
Secondly, understand your financial resilience.
Do not assess affordability solely against today’s repayments. Consider what would happen if rates rose further, household expenses increased or your circumstances changed.
A property that leaves no room for unexpected costs can become a source of financial pressure rather than security.
This is particularly important when borrowing capacity has already been reduced by higher interest rates and the cost of living.
Thirdly, be selective about the property itself.
Not all properties will perform equally over time. Location, land content, scarcity, condition, functionality and competing supply can all influence long-term demand.
None of these factors eliminates risk. However, they provide a more useful basis for making a purchasing decision than trying to predict the next interest rate move.
The bottom line
Wednesday’s inflation figures have strengthened the case for another RBA rate increase. Buyers should take that possibility seriously and understand what it could mean for their finances.
But the question of whether rates will rise next Tuesday is only part of the story.
Japan’s experience demonstrates that property markets can be vulnerable when excessive borrowing and unrealistic expectations become embedded in prices. Its more recent experience also illustrates that rising interest rates do not automatically prevent prices from increasing in locations where demand and supply support them.
I would not use Japan’s history to predict a Sydney property crash. The circumstances are too different.
Nor would I suggest that Sydney is insulated from the consequences of higher borrowing costs. It is not.
What I would take from both markets is the importance of understanding what is driving prices, rather than assuming that one economic indicator determines the outcome.
For buyers, this means looking beyond the next RBA decision and assessing the property itself, its value relative to comparable sales, the financial commitment involved and the period over which you intend to own it.
The question is not simply whether property prices will rise or fall. It is whether the property you are considering represents a sound purchase at the price you are paying.
That is the question I would want answered before committing to what may be one of the largest financial decisions you make.
If you are considering buying in Sydney and would like to discuss the market or a property you are looking at, I would be happy to speak with you.
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