Economists warn interest rate cuts could reignite Australia’s housing market boom
As global economic storm clouds gather, economists are urging the Reserve Bank of Australia (RBA) not to rely on cutting interest rates to cushion a potential recession. While the United States faces growing financial instability driven by President Donald Trump’s aggressive tariff policy, some experts argue Australia should avoid its usual strategy of slashing rates — a move that historically fuels runaway house prices.
Independent economist Saul Eslake has sounded the alarm, pointing out that in previous downturns such as the Global Financial Crisis (GFC) and the COVID-19 pandemic, aggressive rate cuts led to a surge in property prices, worsening affordability for would-be homeowners.
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Interest rate cuts have unintended consequences
“When the Reserve Bank cuts the cash rate by a lot, what takes off is house prices,” Mr Eslake told NewsWire. “If a US recession spreads through China and pulls Australia into the same hole, we should not automatically assume interest rate cuts are the answer.”
Mr Eslake suggested that fiscal policy — including direct government spending and tax measures — could be a better way to support the economy without inflating property prices.
House prices are already climbing. According to PropTrack, the national median house price hit a new record of $805,000 in April 2025, with prices in major cities even higher. Since the lows of March 2020, property values have surged 48.6 per cent across the country.
RBA faces pressure to break with the US Federal Reserve
With inflation easing and global trade uncertainty rising, economists believe the RBA will soon act independently of the US Federal Reserve. The Fed recently kept its benchmark interest rate steady for a third consecutive meeting, holding between 4.25 and 4.5 per cent. However, market participants expect the RBA to cut rates at its 20 May meeting.
RBA Governor Michele Bullock, who made her first rate cut in February after a five-year pause, has remained cautious in recent months. But the tide may be turning.
“The increasing downside risk to activity and global growth is consistent with an RBA that cuts rates with a bit of insurance,” said Su-Lin Ong, Chief Economist at RBC Capital Markets.
Global recession risks are rising
Much of this caution stems from the impact of President Trump’s newly announced tariffs. On 2 April, the US unveiled a 145 per cent tariff on Chinese imports, along with a universal 10 per cent tax on other countries — including Australia. While Trump paused the tariffs temporarily on 9 April, the policy has already sent shockwaves through global markets.
JP Morgan Chief Global Economist Bruce Kasman warned there’s a 60 per cent chance the tariffs could plunge the global economy into recession.
“Even with the latest step-back, what remains is still enough to push the US and China — and thus likely the global economy — into recession,” he noted.
Australia, deeply tied to China’s economy, is highly vulnerable to such a downturn. The International Monetary Fund recently downgraded Australia’s 2025 growth forecast from 2.1 per cent to just 1.6 per cent.
Domestic conditions support rate cuts — but at what cost?
There is growing consensus among economists that domestic factors could justify further rate cuts. Inflation has cooled significantly, with the March annual rate dropping to 2.9 per cent — well within the RBA’s target range.
“Inflation has undoubtedly been slowing, and most importantly, services inflation slowed,” said Challenger’s Chief Economist Jonathan Kearns. “That’s the sticky part that has made the RBA reluctant to cut. This opens the door to an RBA cut.”
Yet, as Eslake warns, the solution might create new problems. Lowering interest rates would provide short-term relief for borrowers but would likely drive up house prices further, intensifying the affordability crisis.
Banks preparing to pass on rate cuts
If the RBA does proceed with cuts, major banks are expected to follow swiftly. NAB has forecast five rate cuts over the next 12 months, including a 50 basis point cut in May and 25 point cuts in July, August, November, and February 2026. This would bring the cash rate down to 2.6 per cent.
Such moves would reduce monthly mortgage repayments by around $526 on a typical $600,000 loan. Canstar Director of Data Insights, Sally Tindall, said banks would likely be quick to pass on the benefits.
“In this environment, I do not see a world where the banks do not pass on a rate cut,” she said. “They know better than anyone how difficult it’s been for borrowers.”
However, she also warned that if multiple cuts occur in quick succession, banks might begin to delay or limit the impact of those reductions.
A call for a balanced response
With rate cuts likely, experts say it’s crucial for the RBA and the federal government to coordinate monetary and fiscal policy carefully. While easing interest rates might help prevent a sharp downturn, the strategy risks fuelling another housing boom.
Eslake summed it up: “We should not be thinking about interest rate cuts as the only lever we’ve got.”
