Dwelling Investment to Shrink 2.8%: The Construction Chill in the November Forecasts

Sonal Goyal

04 November 2026 05:13 PM AEDT

Dwelling Investment to Shrink 2.8%: The Construction Chill in the November Forecasts

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Key Highlights

The RBA expects dwelling Investment to fall 2.8 per cent over the year to December 2027.
Weaker housing activity is one of the main reasons growth forecasts have been cut.
Higher interest rates and falling home values are weighing on new building.
The construction slowdown also affects how the RBA weighs Inflation pressures.

Home building rarely makes headlines when the RBA changes interest rates, but it features prominently in the bank's November forecasts. In its Statement on Monetary Policy, released on 3 November 2026 alongside the decision to lift the cash rate target to 4.85 per cent, the RBA forecasts that dwelling investment will shrink by 2.8 per cent over the year to December 2027. It then expects a further 1.8 per cent decline over the year to December 2028.

Dwelling investment is spending on building new homes and renovating existing ones. A forecast decline over two years means the RBA expects less residential construction activity, not just weaker sales of existing homes.

What the RBA is forecasting

The forecasts are blunt. The RBA links the weaker housing outlook, together with a higher assumed cash rate path, to its lower GDP growth forecasts from mid-2027. These RBA forecasts include:

Dwelling investment: −2.8 per cent (year to December 2027); −1.8 per cent (year to December 2028)
GDP growth: 1.6 per cent (June 2027), 1.3 per cent (December 2027), 1.3 per cent (June 2028), 1.5 per cent (December 2028)
August comparison for GDP: 1.5, 1.6, 1.6 and 1.8 per cent respectively for those dates

The downgrade is concentrated in the later years. For December 2027, GDP growth is now forecast at 1.3 per cent, compared with 1.6 per cent in August. For December 2028, it is 1.5 per cent, compared with 1.8 per cent. The RBA expects growth to remain below trend.

Why the RBA expects building to cool

The Monetary Policy Board's statement gives the reason in one line: "falls in housing prices and turnover are expected to weigh on growth in dwelling investment".

The housing-price evidence has been building through 2026. The statement says "housing prices have fallen significantly". The SMP puts the fall at about 5 per cent from the March peak. The economic conditions chapter shows national prices 4.7 per cent below that peak in September. The RBA also notes that established housing prices are falling faster than expected, and that external forecasters expect a deeper downturn.

Lower turnover means fewer homes changing hands. Together with lower prices, it describes a market that is cooling across the board. The cash rate is a big part of this. The RBA has raised the target five times this year, a total of 125 basis points, and the statement says those rises "have tightened financial conditions."

Credit data show the slowdown is gradual rather than sudden. The RBA's Financial Aggregates for September 2026 showed housing Credit up 0.4 per cent in the month and 7.0 per cent over the year. That is still growth, but it reflects borrowing decisions made over many months.

A tension inside the forecasts

The construction outlook sits awkwardly with one of the upside risks the RBA identifies. The SMP notes that stronger AI-related Demand could keep global growth and inflation higher, and could add to domestic capacity and construction cost pressures. Data centre investment has helped activity this year, which has been somewhat stronger than expected.

This means two kinds of construction are moving in different directions. Residential building is expected to contract, while some non-residential investment linked to technology has supported growth. If construction costs stay high because of demand from other projects, that could matter for inflation even as home building slows. The RBA presents this as a risk, not as its central forecast.

The SMP also sets out the opposite risk. Inflation could fall faster than forecast if higher rates and falling housing prices weigh on spending. In its downside activity scenario, where households and businesses respond more strongly to oil prices, interest rates and falling house prices, GDP is about 1.0 per cent lower by end-2028 and Unemployment is 0.3 percentage points higher, with inflation only modestly lower.

How housing fits the inflation fight

The RBA's main concern is still inflation. On the November forecasts, headline CPI inflation peaks at 4.5 per cent in the December quarter 2026. Trimmed-mean (underlying) inflation is forecast at 3.6 per cent in December 2026 and does not fall below 3 per cent until the end of 2027, when it is forecast at 2.9 per cent. For context, in the September quarter, headline CPI inflation was 3.9 per cent year-ended, and the trimmed mean was 3.7 per cent year-ended.

So a weaker construction sector is part of how the RBA expects demand to cool and inflation to ease. It is not presented as a goal in itself. The statement says "the Board is focused on its mandate to deliver price stability and full employment." The RBA's unemployment forecasts reflect the cost: unemployment is projected to reach 4.9 per cent in December 2027 and 5.1 per cent by December 2028, both higher than in August.

These forecasts depend on assumptions. They assume a cash rate path based on market pricing as at 28 October 2026, which implies a rise of about 35 basis points by mid-2027 before stabilising at 4.8 per cent in 2028. That is market pricing, not an RBA commitment. If the rate path turns out differently, the housing and construction outlook would probably change as well.

Governor Michele Bullock gave a longer view when she appeared before the Senate Economics Legislation Committee on 28 October, noting that "housing prices are around 50 per cent higher than they were in early 2020." That puts this year's roughly 5 per cent fall in perspective. It is a significant decline, but from a level well above where prices were six years ago.

The RBA's October Financial Stability Review found that most borrowers are well placed for softer growth and lower housing prices, with most having positive Equity and large savings buffers. It also found that banks are well capitalised.

The bottom line

The RBA's November forecasts of a 2.8 per cent fall in dwelling investment over the year to December 2027, and a further 1.8 per cent fall the year after, show a construction slowdown driven by falling prices, lower turnover and a higher cash rate path. That weaker housing outlook is a key reason the RBA now expects GDP growth of only 1.3 per cent in late 2027. These are forecasts, not certainties. AI-related construction demand and the path of interest rates could change them, and the Board says it will be "attentive to the data" as it goes.

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