Governor Michele Bullock says the housing market "has turned down a little bit" even though Australia has "a structural under supply of housing" – two statements that only seem contradictory.

How can a country be short of homes and yet see its housing market soften? It sounds like a contradiction. If there are not enough dwellings to go around, surely prices should keep climbing?

Yet that is the picture Reserve Bank of Australia Governor Michele Bullock described at her media conference on 29 September 2026, the day the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60%. In one breath, she said "the housing market has turned down a little bit". In another: "We do have a structural under supply of housing."

Both things can be true at once. Understanding why requires separating the forces that move housing prices in the short run from those that shape the market over years and decades – and recognising that interest rates push on both, sometimes in opposite directions.

Two clocks running at different speeds

Housing markets can be thought of as running on two clocks.

The fast clock is demand, and it is heavily influenced by how much people can borrow and what it costs them. When interest rates rise, lenders assess borrowers against higher repayments, which tends to reduce how much they can borrow. Buyers with less borrowing capacity bid less, and some step back from the market altogether. Existing owners, facing higher repayments themselves, may be less inclined to upgrade. These effects can show up relatively quickly in prices and turnover.

The slow clock is supply. Building new homes takes time: land must be acquired and zoned, approvals obtained, finance arranged and construction completed. The stock of dwellings changes gradually, so a shortfall built up over many years cannot be quickly reversed.

A "structural" undersupply, in the Governor's words, describes a slow-clock problem – a persistent gap between the number of homes and the number of households wanting to live in them. A market that "has turned down a little bit" describes a fast-clock response to tighter financial conditions. The first does not prevent the second.

Why higher rates can make the shortage worse

Here is where the paradox deepens. The same higher interest rates that cool buyer demand can also discourage the construction of new housing.

Developers typically rely on borrowed money to fund projects, and they need confidence that the finished homes will sell at prices that cover land, construction and financing costs, with a margin on top. When borrowing costs rise and buyers have less capacity to pay, that calculation becomes harder to make work.

The Governor pointed to this directly: "Particularly for high density, it wasn't economic for developers to build." Apartment projects tend to involve large upfront costs and long timelines, and many rely on pre-sales before construction finance is secured. When costs rise faster than achievable sale prices, projects can stall or never start.

Cost pressures are not limited to finance. The Board's statement said "Firms are experiencing cost pressures", and the Governor said "Businesses in our liaison program continue to expect strong increases in their costs." She also noted that "Productivity growth remains weak". In construction, weak productivity and rising input costs mean each new dwelling costs more to deliver.

The result is a feedback loop that can frustrate policymakers and would-be buyers alike: tighter financial conditions soften prices at the margin, but they can also slow the addition of new supply, leaving the underlying shortage in place.

Where housing meets inflation

Housing is not only an asset market; it is also part of the cost of living. New dwelling costs and rents are components of the consumer price index, so a persistent shortage can keep upward pressure on measured inflation even when purchase prices cool.

That connects housing to the RBA's broader concern. The Board said "inflation remains elevated" and warned that high inflation must not become "embedded". Headline inflation was 4.0% over the year to August on the monthly CPI indicator, and the Governor said underlying inflation has "been about 3.5 per cent for the past six months". The target is 2–3%.

Housing also matters for how monetary policy works through the economy. When home values rise, owners often feel wealthier and more willing to spend; when they fall, the reverse can happen. A softening market can therefore contribute to cooling demand. The Governor also said that, according to RBA research, "the most important channel is the exchange rate channel", so housing is one route among several rather than the only one.

What the RBA can and cannot do

Monetary policy is a blunt instrument. The cash rate can influence how much people borrow and spend, but it cannot rezone land, speed up planning approvals or train more construction workers. Those levers sit mainly with governments and industry.

That is one reason central bankers tend to describe housing supply as a structural issue: it lies largely outside the reach of interest rates. The RBA's task is to bring inflation back to target; it has signalled it will keep doing "what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed."

For households and investors trying to make sense of the market, some questions worth considering include:

  • Are local price movements being driven mainly by borrowing capacity, or by local supply conditions?
  • How might further changes in interest rates affect both buyer demand and new construction in a given area?
  • What does a persistent shortage mean for rents and for the pipeline of new dwellings?

The bottom line

The RBA's property paradox is less contradictory than it first appears. A market that "has turned down a little bit" reflects the short-run pull of higher interest rates on borrowing and buying. A "structural under supply of housing" reflects a long-run gap that rates cannot close – and that dearer finance and rising costs may even widen, particularly for high-density projects. With the Board leaving the door open to further increases and its next decision due on 3 November 2026, the tension between softer prices and scarce supply looks set to remain a defining feature of Australia's housing story.