How property investors are adding to interest rate pressure in Australia
The country’s banking regulator is under pressure to cut lending to investors, slowing the pace of the property market and the entire economy as new figures show speculators are driving up prices of entry-level homes sought by first-time buyers.
Although house values across the country rose a further 0.8 per cent in the year to February and remained flat in Sydney and Melbourne, where more homes are coming to market, one of the country’s leading economists said last month’s interest rate rise could have been avoided if regulators clamped down on investor lending.
The reserve sets interest rates with the aim of keeping inflation between 2 and 3 percent while keeping as many people working as possible; however, the Australian Prudential Regulation Authority is responsible for stability across the banking sector.
On February 1, APRA set out new rules for banks that mean no more than 20 per cent of new loans can flow to borrowers of six times their income or more. Restrictions apply to both investors and owner-occupiers.
The change was not expected to have a significant impact on investors after APRA acknowledged that several major lenders would be caught out in the move, which was described as a “pre-emptive” step against the decline in credit standards.
Figures released by the RBA on Friday showed that loan growth for property investors has reached the fastest pace since the end of 2015, rising by 8.9 per cent in the last 12 months. A year ago, before the Central Bank’s interest rate cuts, loans to real estate investors were increasing by 5.3 percent.
In contrast, loan growth to owner-occupiers rose from 5.7 percent to 6.1 percent over the same period, indicating a large increase in loans to investors.
In the last three months of 2025, investors used a record 50,449 mortgages to purchase an existing property.
Since the RBA started cutting rates in February and December last year, the number of loans investors take out to buy an existing home has increased by 25 per cent. The number of mortgages taken out by first-time buyers increased by 11 per cent over the same period.
Independent economist Saul Eslake said investors’ reaction to last year’s rate cuts was clearly a problem for the Reserve Bank and its efforts to keep inflation under control.
He said the RBA might not have had to tighten monetary policy if APRA had taken stronger action, as it did in 2017, when it restricted interest-only loans, almost all of which are used by investors.
“If APRA had done this, it could have prevented the increase in interest rates,” he said in this article.
Concerns about the way investor loans are growing are growing within the Central Bank.
In the minutes of the meeting at which it raised official interest rates by a quarter of a point, the RBA noted that home loans had “increased markedly” and were driven by “an increase in investor lending”.
In its latest monetary policy statement, the bank said the rise in overall mortgage lending largely reflected “stronger investor growth”.
“Owner-user loan growth [which comprises two-thirds of overall housing credit] “also increased, but at a much lower rate than investor credit growth,” he said.
A major problem for the Federal Reserve is that low interest rates often lead to high property prices. This makes homeowners feel wealthier, which supports increased spending.
Last week the bank’s head of economic analysis, Michael Plumb, noted that “stronger-than-expected real household incomes and wealth” had contributed to an unexpected rise in household spending through the second half of 2025.
This increase in wealth was driven by real estate prices. In the 12 months to the end of September, the value of homes in Australia increased by $875 billion to $12 trillion.
The issue is linked to demands for changes to the 50 per cent concession on capital gains tax and the way it helps investors compete against first-time buyers for limited, affordable properties.
Former Treasury Secretary Ken Henry argued in a Senate inquiry into the tax last week that the privilege should be changed and described how it personally affected his family.
“There would be tens of thousands, perhaps hundreds of thousands, even millions of parents in Australia who could tell the same story – stories of standing at an auction, seeing their children – potential owner-occupiers – outbid investors,” he said.
Data released by Cotality on Monday suggested investors were the key driver of the recent rise in prices.
Perth and Brisbane reported that their property markets continued to rise, with home values in the cities rising by 2.3 per cent and 1.6 per cent respectively in February. Perth’s median home value has risen by more than a fifth to $1.03 million in the last 12 months, while in Brisbane it has risen 16.7 per cent to $1.175 million.
But house values in Sydney and Melbourne fell by 0.2 per cent last month. While Cotality noted that the number of homes for sale in the two cities rose sharply through February, both fell 0.4 percent in the last three months.
Tim Lawless, research director at Cotality, said demand for affordable homes remained strong. In Sydney alone, values of the city’s cheapest homes rose by 0.8 per cent, while prices of the most expensive homes fell by 0.9 per cent.
Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
