The Reserve Bank held the cash rate steady through the second half of 2025 and into early 2026, but that headline obscures a harder fact: three earlier rate rises in late 2024 and early 2025, combined with climbing insurance, council rates and utilities, meant households needed wage growth around 8–9% just to maintain the same purchasing power they had twelve months earlier. The national median sat closer to 4%.
That gap is the real story. For anyone tracking their own borrowing capacity or repayment buffer, the divergence between what the RBA isn’t doing now and what it already did explains why affordability feels worse even when the official line is “steady as she goes.”
The mechanics behind the 8% number
Start with three 25-basis-point rate rises totalling 75 basis points. On a $600,000 loan at 6.5%, that lift alone adds roughly $280 per month in repayments, call it $3,360 annually. For a household earning $120,000 gross (close to the national median for dual-income owners), that’s a 2.8% hit before tax.
Then layer in non-discretionary cost increases: home and contents insurance up 10–15% on average, council rates rising 4–6%, electricity and gas climbing 8–12% depending on state. For a typical owner-occupier those three alone can add another $1,500–$2,000 a year. The combined serviceability drain, higher mortgage plus higher holding costs, pushes the required pre-tax income gain to roughly 8% just to keep the same cashflow headroom as the previous year.
Most households didn’t get that. Wage Price Index data through Q4 2025 showed annual growth around 4.1%, and while some sectors (healthcare, construction trades) saw stronger gains, the median buyer or upgrader fell well short of the break-even threshold.
Who carries the weight
Recent buyers with high loan-to-value ratios feel this first. A household that bought in late 2023 or early 2024 at 90% LVR is carrying maximum debt service relative to income. The three rate rises alone can push debt-to-income from 5.5× to the edge of 6×, and the income required to maintain a 30% repayment buffer climbs accordingly.
Refinancers fare slightly better if they moved to a sub-6% variable rate during the recent lender competition window (49 lenders now sit below 6% according to recent tracking), but even a 50-basis-point saving only claws back part of the 75-basis-point policy increase, the net position is still tighter than a year ago unless wage growth kept pace.
First-home buyers and upgraders waiting on the sidelines face a different squeeze: borrowing capacity has dropped materially even though headline prices in some markets have eased. Borrowing capacity is down around $70,000 in serviceability terms for median earners, meaning the price correction hasn’t translated to improved access for most.
Key numbers
- Three rate rises (75 bps total) added ~$280/month to a $600k loan
- Combined with insurance/rates/utilities, annual holding cost increase: $5,000–$6,000
- Median household wage growth Q4 2025: 4.1%
- Required wage growth to break even on serviceability: 8–9%
- Gap: roughly 4 percentage points, or $4,800/year shortfall for a $120k household
The policy frame and what it misses
The RBA’s messaging through late 2025 emphasised “patient” settings and data-dependence, with inflation tracking back toward the 2–3% band. The cash rate hold obscured the reality that monetary tightening had already done its work, the lag effect of those three rises was still working through household budgets well after the board stopped moving.
Global uncertainty (trade tensions, energy price volatility, Chinese demand softness) added another layer. Even households with stable employment faced higher precautionary saving and reduced confidence, which compounds the affordability problem: it’s not just whether you can service the loan on paper, it’s whether you’re willing to commit that much of your income when the outlook feels brittle.
Some commentary framed this as a temporary mismatch that wage catch-up would resolve over 12–18 months. Others pointed to structural drags, productivity growth stuck near zero, migration intake slowing, sectors like retail and hospitality seeing wage stagnation, that suggest the gap persists longer than the base case assumes.
Pressure points for the next six months
If wage growth stays around 4% and the RBA holds (base case), the affordability gap remains open but stable. Households adjust by cutting discretionary spending, delaying upgrades, or tapping equity to smooth cashflow, all second-order drags on consumption and housing turnover.
If inflation proves stickier than expected and the RBA moves again (low probability but not zero), the required wage growth jumps to 10%+ and the number of marginal borrowers in genuine stress rises sharply. Arrears are still low historically, but the buffer is thinner.
If wage growth accelerates, say, a tight labour market in construction and health pushes the national figure closer to 6%, the gap narrows but doesn’t close, and it takes another 12 months of above-trend gains to restore the 2023 baseline.
What it means if you’re making a call
If you bought in the past 18 months and your wage increase fell short of 8%, your serviceability position is tighter than it was. Run the numbers on your actual buffer: can you still cover repayments plus essentials with 30% headroom if rates hold here for another year? If the answer is marginal, prioritise building a cashflow reserve and avoid further leveraging (HELOC drawdowns, new investment purchases) until income catches up.
If you’re waiting to buy, understand that borrowing capacity has shrunk even where prices have softened. A 5% price drop doesn’t help if your maximum loan has fallen 10% in serviceability terms. Focus on deposit size and genuine savings rate, the affordability equation turns on income multiple, not headline price alone.
If you’re an investor assessing new purchases, factor in that tenant households face the same wage-cost gap, which constrains rental affordability and increases vacancy risk in softer markets. Yield alone doesn’t cover the story if tenant turnover rises or rent collection slows.
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General info, not financial advice.
