An interest rate pause, but the pain may not be over yet
Borrowers may need to dig deep before the year is out
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The prospect of another interest rate hike rests on the outcome of the June quarter inflation figures, research director at property data analysts CoreLogic said.
CoreLogic’s Tim Lawless said while yesterday’s decision by the RBA Board to keep interest rates on hold was welcome news for mortgage holders, it was not an indication that rates had peaked.
“The June quarter inflation outcome, to be released late this month, will be critical in determining whether there are more rate hikes ahead,” he said.
Although most economists expected the RBA Board to increase the cash rate by another 25 basis points yesterday, governor Philip Lowe said the board recognised the need for a pause as the full impact of a four per cent rise in rates since May last year fully played out.
However, another rate rise is clearly still on the table.
“Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline,” Mr Lowe said. “But inflation is still too high and will remain so for some time yet.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. For these reasons, the Board’s priority is to return inflation to target within a reasonable timeframe.”
Navigating a pathway through managing inflation via additional rate rises without further limiting access to credit will be tricky, Mr Lawless said. At the same time, higher cost of living was having a negative impact on consumer confidence.
“Currently high interest rates and the potential for a hike in August could weigh further on consumer sentiment, which is already around GFC lows,” he said. “Historically consumer sentiment and housing market sales have been closely correlated.
“The combination of high cost of living pressures, negative real income growth and the high cost of debt have made it hard for borrowers to obtain credit approval, especially with lenders less willing to lend on high debt-to-income ratios, high loan-to-income ratios or on smaller deposits.”
He said the current level of interest rates would most likely expose more borrowers to mortgage arrears in the coming months, although it may not be as severe as some predicted.
“To date, the majority of borrowers have kept on track with their mortgage repayments, with APRA data for the March quarter indicating only half a percent of home loan borrows had fallen less than 90 days behind on their mortgage repayments,” Mr Lawless said.
“While the portion of borrowers falling behind on their repayment schedule is likely to rise, Australia’s unemployment rate is forecast to remain below 5 percent, which should help to prevent a material blowout in mortgage arrears.”
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Strong consumer spending and tight supply have driven retail to the top of commercial property, but signs of pressure are starting to emerge.
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Australia’s retail property sector entered 2026 as the strongest performing commercial asset class, but rising geopolitical risks and cost pressures are beginning to test its resilience, according to new research from Knight Frank.
The latest Australian Retail Review shows the sector rode a wave of consumer spending and constrained supply through 2025, delivering total returns of 9.2 per cent and driving transaction volumes up 43 per cent year-on-year to $14.4 billion.
That momentum carried into early 2026, with around $3.6 billion in deals recorded in the first quarter alone.
“Retail clearly emerged as the standout commercial property performer in 2025,” said Knight Frank Senior Economist, Research & Consulting Alistair Read.
“Improving household spending, limited new supply and stronger leasing fundamentals combined to drive better income growth and renewed investor confidence in the sector.”
Spending rebound drives retail strength
A lift in household spending has been central to the sector’s performance. Consumer spending rose 4.6 per cent year-on-year to February 2026, supported by easing inflation and improving real incomes.
That shift flowed directly into retailer performance, with average EBIT margins across major retailers rising to 8.9 per cent in the first half of 2026, their strongest level in several years.
“Stronger consumer spending was critical in restoring momentum to the retail sector,” Mr Read said.
“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres.”
Improved trading conditions also pushed leasing spreads up 4.2 per cent in 2025, reinforcing income growth and supporting capital values.
Geopolitical tensions begin to bite
But the outlook has become more complicated. The report warns that escalating conflict in the Middle East and its impact on fuel prices, supply chains and interest rates could weigh heavily on consumer spending.
“Higher fuel prices, flow-on cost pressures across supply chains, and recent interest rate increases are collectively squeezing household budgets, and early consumer sentiment data suggests confidence is already softening,” Mr Read said.
“While household balance sheets remain generally resilient, heightened uncertainty over future costs is likely to weigh on spending — particularly in discretionary categories — in the months ahead.”
The impact is already being felt in investment activity. While the year began strongly, transaction volumes slowed in March as investors paused amid the uncertainty.
“Early indicators suggest elevated uncertainty has already begun to affect the market. While retail investment enjoyed its strongest start to a year in a decade, with nearly $3 billion transacted by the end of February, activity stalled in March, as investors took a pause amid elevated uncertainty,” Mr Read said.
Solid foundations support medium-term outlook
Despite the near-term headwinds, Knight Frank maintains that the sector’s underlying fundamentals remain strong. Limited new supply, high construction costs and population growth are expected to continue supporting rental growth over the medium term.
“Retail has entered this period of uncertainty from a position of strength,” Mr Read said.
“Supply-side constraints, population growth and improving income fundamentals remain powerful structural supports for the sector.”
The report highlights several trends shaping the year ahead, including steady yields as interest rates rise, mounting pressure on tenant margins, continued outperformance of prime centres, the growing need for logistics integration, and risks linked to underinvestment in capital expenditure.
For now, retail remains a sector with momentum, but one increasingly at the mercy of forces far beyond the shopping centre.
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