High interest rates here to stay, but only one part of house price story

analysis High interest rates are here to stay — but that's only part of the house price story Mon 10 Aug 2026 at 4:52am We seem to have flipped from worrying about rising house prices to worrying about falling house prices. Well, some of us have, anyway. Last Tuesday's front-page lead in The Australian, reporting the July house price data, was "$230 billion hit: value going, going, gone", describing it as a "once-in-a-generation housing slump". It does sound like a lot, but it is just a 1.8 per cent decline from $12.77 trillion to $12.54 trillion, so just an old-fashioned page-one beat-up. Next day, they followed up with "ALP turns blind eye to house market mugging", another beat-up, quoting NAB's new forecast that house prices in major east coast cities (Melbourne and Sydney) will fall 10 per cent. But since the low point of February 2023, the national median house price has increased another 35 per cent, a compound annual growth of more than 10 per cent and a fabulous, unexpected windfall to home owners as well as a devastating lockout for those who are not. That happened even after interest rates increased four more times in 2023 and then stayed there, followed by three cuts last year and three hikes this year. That was caused by a blowout in immigration in 2022-23, a massive increase in construction costs after the pandemic and a decline in dwelling approvals. If house prices did fall 10 per cent from this year's peak, it would indeed be a "once-in-a-generation" event since the largest decline in the past 50 years was 8 per cent in both 2010 and 2017. It would reduce the rise since February 2023 back to 20 per cent and result in a slight improvement in Australia's very poor housing affordability. Will it happen? Possibly, but it's complicated, and impossible to predict. Loading...End of the low interest rate era The two reasons prices are falling now are this year's three rate hikes and the budget changes to negative gearing and capital gains taxation, causing some investors to get out, as intended. Against that, Treasury predicted that those budget changes would eventually result in fewer houses being built, so it's possible that the longer-term impact of them will be higher prices. As for interest rates, the Reserve Bank is certain to leave them on hold when it meets today and tomorrow and very likely to keep them there for the rest of the year, although the futures market is putting a 64 per cent chance on a hike in 2026 … along with a 63 per cent chance of a cut in 2027, as the economy slows in response to the cuts. In general, though, the days of super-low interest rates that characterised the decade from 2012 to 2022, and which pushed house prices up by 60 per cent, are over — unless there is another GFC or pandemic (which can't be ruled out, of course, with share prices at record highs and bird flu on the march). Bond markets have taken the 10-year interest rate to 5 per cent — the highest in 15 years — as part of a global rise in government bond yields. That is happening because a surge in spending on data centres and defence has collided with historically high government debt. That collision has brought decades of savings glut to an end and is likely to lead to structurally higher interest rates for decades to come. Enter AI Political populism has permanently increased government spending and lowered taxation, while the end of globalisation and America's role as the guarantor of peace has meant that all countries must now spend more on defence. Meanwhile, the arrival of AI has dramatically increased the need for more "compute", or computer processing capacity, produced in factories known as data centres. The amount of computing used in an AI query is potentially 10 times higher than the now-redundant Google search, partly because it usually results in a dialogue rather than simply a list of links, but also because you can do far more with AI, such as create videos and photos and write software code. On top of that, the number of queries is multiplying exponentially because of the Jevons paradox, which states that as efficiency lowers the effective cost of using a resource, demand grows and often outpaces the initial savings. The effect of those two multiplications is that the demand for compute is increasing about 3,000 to 5,000-fold, resulting in a huge increase in the number of data centres. Whether there will be enough money made from AI to service the colossal amount of capital raised to build them, especially now that China has spoiled the US oligopoly party, is another matter, and is causing some anxiety among investors (but not most of them — share prices are at record highs, so optimism still rules). And this is before the next phase of AI takes hold — that is, humanoid robots, also described as "physical AI". My X (Twitter) feed at the moment is full of videos of robots expertly doing all sorts of jobs, like mopping the floor, making hotel beds, building a house, laying bricks, kneading bread dough, making furniture, and picking tomatoes. I'd say most, if not all, of these are fake — AI videos based on humans doing the work and made to look like robots — but I can't be sure. And anyway, it's early days. It won't be long before robots can do all those things, and more. This is not the place for a philosophical discussion about what this means, and how bakers, hotel staff, bricklayers, carpenters and fruit-pickers will be occupied and paid, but it obviously means a lot — for the future of work and humanity itself, as well as the demand for compute and data centres. Bottom line: high interest rates are here to stay, which will continue to weigh on house prices. But that is only part of the housing story; physical demand and supply are important as well, which is where the complications come in. LoadingThe role of migration The Labor government seems to be in the process of turning Treasury's migration forecast in the budget into a target, as a part of its defence against One Nation as well as the housing affordability project. The forecast for 2025-26 was increased from 260,000 to 295,000 in the nick of time; it's likely to have been exceeded but not by much — only by 10,000 or so. The forecast of 225,000 for the current financial year and beyond will be a more challenging target because a lot of it is demand-driven and not even identified by the government, let alone controlled, as we learned in 2022-23 when Treasury forecast net overseas migration of 180,000 and it turned out to be 513,000. If they plan to get net overseas migration down from 300,000 or so to 225,000 this year by using the lever they do control, which is skilled migration, that could be a problem, since one of the reasons for a shortage of housing is a shortage of tradies, which the industry is desperately urging the government to address with more skilled migration. You could do it by having fewer business undergraduates and cooks and more construction workers, but that would require a level of intervention the government has so far either avoided or failed to achieve. (In the years following World War II, the Labor government did intervene, setting up offices around the UK and Europe to recruit tradespeople and paying for them to get here, so it's not impossible.) The other target — of building 1.2 million homes over five years from 2024 under the National Housing Accord — is already proving a challenge, or rather "ambitious", as the government prefers to call it. States and local councils can release all the land they want, and increase height limits around stations, but if there aren't enough people to build them, and enough developers prepared to take the risk, the houses and apartments won't get built. Alan Kohler is a finance presenter and columnist on ABC News. He hosts the podcast That’s Business with Alan Kohler in the ABC Business Daily feed on Friday. He also writes for Intelligent Investor.