The Commonwealth Bank of Australia (CBA) has issued a warning about a significant new challenge facing the Australian economy. While earlier concerns centered around geopolitical tensions in the Middle East, particularly the Strait of Hormuz, recent developments have shifted the focus to the domestic housing market. CBA's head of economics, Belinda Allen, highlighted that the risks have transitioned from international conflicts to a deteriorating property market. She noted that the impact of the war in Iran was less severe than initially expected, with oil prices peaking lower and a cut to the fuel excise tax buffering households compared to earlier projections. However, the downturn in the housing market is now anticipated to offset the better starting point for household incomes, leading to a slowdown in household spending as the year progresses.
In the months following the May budget, Australia's housing market has been under pressure. Sydney house prices fell by 1.2% in June and 3.2% over the quarter, while Melbourne experienced a 1% decline over the past month and a 2.6% drop in the past three months. These were the largest one-month declines for both cities since August 2022. The mid-sized capitals are still outperforming Sydney and Melbourne, but momentum has also slowed materially in these markets. House price growth has been weaker than expected since the Budget, with revisions to recent data reinforcing this loss of momentum.
Despite avoiding the worst fears of the US-Iran conflict, Ms. Allen still forecasts Australians to feel the impacts of cost-of-living pressures. CBA predicts inflation to remain above 2.5% until at least 2028. Australia's all-important trimmed mean inflation rate – which the Reserve Bank of Australia watches as it strips out volatile items – came in at 3.6% in the 12 months to May. Meanwhile, headline inflation came in at 4% for the 12 months until May, down from 4.2% in April. Both of these figures are above the Reserve Bank's target of two to three percent inflation.
At the same time, unemployment—which is currently at 4.4%—is expected to peak at 4.8% by the end of 2027. But in a welcome reprieve for mortgage holders, Ms. Allen said a weakening economy would allow the Reserve Bank to hold the cash rate for the rest of the year. "For the interest rate cycle, we maintain our view that the RBA will be on hold for the remainder of 2026," she said. "There are risks further tightening will be required late this year if growth is more resilient and inflation more persistent."
Looking forward, Ms. Allen predicted the next interest rate move would be a cut. "We expect two rate cuts in 2027, which should help stabilise household spending and the housing market," she said. "This should see growth recover into late 2027 and the labour market stabilise. By the end of 2027, we see GDP growth back to around potential at two percent."
In summary, while the Australian economy has managed to navigate external shocks, the internal challenges posed by a weakening housing market and persistent inflationary pressures present significant hurdles. CBA's outlook suggests a cautious approach, with expectations of interest rate cuts in the near future to support economic stability.