As a Melbourne homeowner or prospective buyer, you will understand how important interest rates are for your mortgage decision. But, what you might not realise is how much valuable insight can be gained from understanding the history of interest rates in Australia, their impact on the economy and property market, and how these trends could impact your long-term financial goals.
The fluctuations of the official cash rate set by the Reserve Bank of Australia (RBA), have profoundly shaped the Australian property market. By looking back, we can prepare for what lies ahead.
The role of the Reserve Bank of Australia in setting interest rates
The RBA controls the cash rate, which in turn has a significant influence on the rates that banks charge each other to borrow. This base interest rate influences other interest rates in the economy, such as those charged on loans or earned on savings.
Several key economic indicators inform the RBA’s interest rate decisions, including inflation, employment levels, wage growth and overall economic performance. When inflation is high, the RBA typically raises interest rates to encourage saving over borrowing and spending, which helps reduce demand in the economy and ease upward pressure on prices. Conversely, when inflation and growth are low, the RBA may lower rates to stimulate activity and encourage investment.
The evolution of interest rates in Australia and the key economic events that shaped it
Australia's interest rate journey has been remarkably varied. As the graph below shows, the official cash rate has fluctuated over the last 35 years from highs of 17.5% in the early 1990s to lows of 0.10% during the pandemic, and everything in between.
Oil shocks and rising inflation in the 1970s
Two major disruptions in global oil supply in 1973 and 1979 triggered rapid inflation. With access to oil reduced, fuel and transport costs soared, leading to higher costs across all sectors of the economy and significantly contributing to the high inflation experienced worldwide.
Double-digit inflation became a stubborn problem for Australia and many other economies. Several domestic factors added to this issue, including rising wages, strong consumer demand and expansionary government fiscal policies. These elements combined to push prices higher for an extended period.
Record-high interest rates in the 1980s
As inflation spiralled and remained stubbornly high through the mid-to-late 1980s, the RBA, in line with central banks worldwide, had to act decisively. The RBA raised interest rates sharply to rein in spending and stabilise prices. This led to one of the most volatile periods in Australia's interest rate history.
The 1980s witnessed some of Australia's highest interest rates, ultimately reaching a record-high of 17.5% in January 1990. This tight lending environment succeeded in its primary goal: breaking the back of the high inflation that had troubled the country for over a decade.
Recession and rapid rate cuts in the 1990s
The consequence of such aggressive monetary tightening, however, was a steep slowdown in economic activity. The international stock market slump of October 1987 (known as Black Tuesday in Australia) saw markets crash around the world. Combined with soaring interest rates, Australia slipped into a recession that lasted until late 1991.
To stimulate the economy and bring it out of recession, the RBA dropped rates rapidly. In just three years, interest rates dropped from 17.5% in January 1990 to 4.75% by July 1993.
Economic stability in the late 1990s and early 2000s
Through the rest of the 1990s and early 2000s, Australia entered a period of relative economic stability, supported by low inflation, steady growth and more moderate interest rates that typically sat between 4% and 7%.
This trend continued into the 2000s before the 2008 Global Financial Crisis (GFC).
Sharp cuts after the GFC
In response to global instability in 2008, many central banks – including the RBA – cut rates sharply to support the economy. Though official interest rates in Australia did not fall to the low levels seen overseas, the RBA did make drastic cuts, lowering the cash rate from 7.25% in September 2008 to 3.00% by April 2009 to stimulate the economy and support stability.
The RBA’s response proved effective. Australia was the only advanced economy to avoid a technical recession during the GFC.
Following the post-GFC rate cuts, the 2010s were largely defined by a prolonged period of rate stability and a gradual downward trend. The cash rate slowly declined to 1.5% by mid-2016 and remained there for several years before dropping to 0.75% by the end of 2019. This environment of sustained low interest rates provided homeowners and investors with relatively predictable borrowing costs, becoming the 'new normal' that drove property market growth.
Record-low rates during the COVID-19 pandemic
The RBA again acted decisively during the COVID-19 pandemic, dropping the cash rate to an all-time low of 0.10% in November 2020. This period created an unprecedented environment of cheap money, fueling strong property price growth.
Post-pandemic inflation surge and rate tightening
This ultra-low rate environment, however, proved unsustainable. As the economy rapidly recovered from the pandemic, global supply chain disruptions combined with strong domestic demand (fuelled by the cheap money) led to a surge in annual trimmed mean inflation, which peaked at 6.8% in late 2022, according to the Australian Bureau of Statistics (ABS). This was well outside the RBA's target band of 2–3%.
To bring inflation back under control, the RBA embarked on a tightening cycle in May 2022. The cash rate was increased, eventually peaking at 4.35% by November 2023.
Following this aggressive tightening, underlying inflation finally began to moderate, leading to the current easing cycle. The RBA began cutting the cash rate in early 2025, which has seen the rate drop to 3.60% as of November 2025.
How historical interest rates impacted the Australian property market
Interest rate movements have always had an effect on property market dynamics. When interest rates are high – as they were in the early 1990s – mortgage repayments can consume a significant portion of household income. This limits purchasing power and reduces the number of buyers in the market. With fewer buyers around, sellers have to compete harder to attract interest, often lowering their asking price just to sell.
As a result, high interest rates have typically driven a drop in property prices. The graph from the Australian Property Institute (API) below shows this clearly: house prices in the early 1990s declined or stagnated across all capitals, in line with a period of very high interest rates.
On the other hand, when rates are low, borrowing capacity increases dramatically, making homes more affordable in terms of monthly repayments. This surge in demand, coupled with limited supply, tends to put upward pressure on prices.
We saw this clearly during the pandemic. With rates at record lows, home values soared. The API graph above clearly demonstrates how house prices grew rapidly between 2020 and 2022, slowing in 2022 when the RBA began raising rates.
It is also important to remember that while interest rates strongly influence affordability and demand, they are not the only factors affecting property values. Supply constraints, local infrastructure projects, population growth, changes in lending criteria and new or expanded government grants can all amplify or dampen price movements. Even in a high-rate environment, areas with undersupply may experience strong price growth.
This is the state of the current market. Despite higher interest rates, limited supply and sustained demand have pushed property prices up, with dwelling values rising close to 50% over the past five years, according to Cotality.
Comparing historical interest rates to current trends
For a borrower who had only ever known the low-rate environment of the 2000s and 2010s, today’s Australian interest rates may seem high. However, in a longer historical context, they can be considered relatively moderate.
The current cash rate of 3.60% represents a middle ground – it is significantly above pandemic-era lows but on par with or below the rates of the previous two decades.
Recent ABS data suggests that some inflationary pressure may remain in the economy. With private demand recovering and labour market conditions still appearing tight, the RBA decided it was appropriate to maintain the cash rate at its current level in November 2025.
What borrowers can learn from Australia’s interest rate history
These historical patterns offer several lessons for today's borrowers and investors:
1. Rate cycles are inevitable
No rate environment lasts forever. Borrowers who bought at the 1990 peak of 17.5% eventually benefited from dramatically lower rates. Similarly, those who capitalised on ultra-low pandemic rates have since seen the market normalise.
2. Stress-testing your finances is vital
Plan for variance in rates. Even if rates are low now, history shows they will change. Ensuring your cash flow can handle increased repayments is sensible. Lenders use the mortgage serviceability buffer (currently three percentage points above actual rates) to assess your ability to continue making monthly repayments if interest rates were to rise three percentage points. You can do the same and plan accordingly.
3. Property fundamentals matter in addition to rates
While interest rates play a major role in shaping affordability and demand, long-term property performance still depends on fundamentals like location, infrastructure and lifestyle appeal. Focusing on quality assets rather than short-term rate movements can help borrowers build more resilient portfolios over time.
4. Loan type can make a big difference
The choice between fixed and variable mortgage interest rates is often a trade-off between certainty and flexibility. Historically, periods of rate stability or decline favour variable rates, but a split rate option may offer a balance that suits long-term goals.
How AXTON Finance can help you navigate interest rate changes
At AXTON Finance, we understand that interest rate movements create both challenges and opportunities for buyers and homeowners. We use our expertise to:
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Optimise your borrowing: We look beyond headline rates to structure a loan that maximises your financial position and cash flow, whether you are upgrading to a new family home or investing in a new asset.
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Provide access to a wide range of options: We have established relationships with a vast panel of lenders, ensuring you have access to competitive rates and products tailored to your financial circumstances and long-term goals.
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Produce customised financial modelling: Using our exclusive software, Next Purchase, we can model how different interest rate scenarios will affect your repayments, cash flow and overall borrowing capacity. By understanding potential rate movements, you can make informed decisions about when and how to purchase your next property, reducing risk and maximising opportunity.
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Review and refine your loan regularly: Interest rates and lending conditions change over time, which means the loan that suited you a few years ago may no longer be the right fit. We conduct regular loan reviews to ensure your mortgage remains competitive and aligned with your goals, and we can assist with refinancing if a more suitable option becomes available.
Don’t let Australia's interest rate history prevent you from making your next property move. Let AXTON Finance's expertise turn interest rate uncertainty into a strategic advantage.
Ready to make your next property move with confidence in today’s interest rate environment? Axton Finance helps Melbourne homeowners and investors navigate rate changes, structure loans for optimal cash flow and secure competitive terms. Call 03 9939 7576, email getabetterrate@axtonfinance.com.au or get in touch today.