Why Falling Inflation Hasn’t Fixed Housing or Markets

As we move toward 2026, inflation is no longer the dominant shock it was in 2022 and 2023. Headline measures in both Australia and the United States have clearly rolled over, and central banks are no longer in emergency tightening mode. Yet this does not mean the inflation episode is finished in its economic impact. The more important phase is now unfolding through delayed effects.

Monetary policy works with long and uneven lags. The decisions taken over the past two years are still filtering through household balance sheets, corporate investment decisions, asset prices, and housing markets. What emerges in 2026 is not a clean “post-inflation” environment, but a transition period where growth, pricing power, and asset values are shaped by the after-effects of restrictive policy rather than by inflation itself.

This makes the outlook more nuanced than the simple soft-landing versus recession framing that often dominates market discussion.

2026 Outlook: Inflation, Interest Rates & Growth Forecasts

Both countries are poised for disinflation in 2026, though neither is expected to hit the exact 2% target within the year. Economic growth is projected to be moderate, avoiding recession under base-case assumptions. The table below summarizes key official forecasts for 2026:

(Sources: RBA Statement on Monetary Policy Nov 2025; Fed Summary of Economic Projections Dec 2025.)

Australia: Restrictive Policy Meets Structural Constraints

Australia enters 2026 with inflation easing, but still uncomfortably above the central bank’s target band. In response, the Reserve Bank of Australia has adopted a cautious stance, holding rates steady while making clear that it is not yet confident inflation has been fully contained.

What complicates Australia’s situation is that some of the most persistent inflationary pressures are structural rather than cyclical. Housing costs, insurance, utilities, and services inflation are not especially sensitive to incremental changes in interest rates. In fact, higher rates can worsen the problem by discouraging new housing supply and increasing the cost base for service providers.

The construction sector illustrates this clearly. Financing costs remain high, labour remains constrained, and many builders are still recovering from the fixed-price contract failures of recent years. Even with strong underlying demand, new housing supply struggles to respond. This leaves rents elevated and dwelling prices supported, feeding directly into inflation measures while placing pressure on household budgets.

As a result, Australia’s adjustment is likely to be slow rather than sharp. Growth remains below trend, consumption is restrained, but widespread financial stress is avoided as long as employment holds up. Inflation falls, but gradually, and policy remains restrictive for longer than many households or markets would prefer.

The United States: Further Along the Normalisation Path

The United States is in a somewhat different position. Inflation has moderated more convincingly, giving the Federal Reserve greater flexibility. Policy rates have already begun to move lower, though they remain high enough in real terms to keep financial conditions from becoming loose.

Importantly, the U.S. economy never experienced a severe contraction during the tightening phase. Labour markets cooled without collapsing, wage growth slowed without stalling, and consumer spending remained resilient. This allows the Fed to ease cautiously, monitoring how inflation behaves rather than needing to actively support growth.

By 2026, the U.S. appears to be operating near a neutral policy setting. Growth is slower than the post-pandemic rebound, but stable. Inflation continues to drift lower, though the final move back to target is gradual. This creates an environment that feels less dramatic than recent years, but also less fragile.

Equity Markets: A Shift Toward Fundamentals

Equity markets have already responded to the disinflation trend, particularly in the United States, where expectations of lower rates and enthusiasm around technology and artificial intelligence have driven strong gains. Looking ahead, the more relevant question is how markets behave once the easy macro tailwinds fade.

In a world where rates remain positive and capital has a meaningful cost, valuation discipline matters more. Earnings quality, balance sheet strength, and pricing power regain importance. Companies that relied on cheap funding or distant growth projections face a more demanding environment, even if overall market conditions remain supportive.

At the index level, this suggests more modest returns compared to the sharp rallies seen earlier in the cycle. Beneath the surface, dispersion increases. Some sectors and companies continue to do well, while others struggle, even within broadly rising markets. This is a typical feature of a more mature expansion rather than a sign of systemic weakness.

Residential Property: Persistent Supply Issues Dominate

Housing remains one of the clearest examples of policy lag effects.

In Australia, prices continue to be supported by chronic undersupply. Strong population growth, limited listings, and weak new construction combine to keep competition intense, even with borrowing costs at multi-year highs. Affordability has deteriorated sharply, particularly for first-home buyers, but this has not translated into broad price declines because supply remains so constrained.

The economic consequence is not a housing crash, but a redistribution of pressure. More household income is directed toward housing costs, leaving less for discretionary spending. This dampens consumption and growth without resolving the inflation problem, particularly in rents.

In the United States, the housing market has adjusted differently. Prices largely flattened rather than fell, as high mortgage rates locked existing owners in place and constrained supply. As wage growth continues and mortgage rates ease modestly, affordability is expected to improve gradually. Activity may recover without reigniting the rapid price growth seen earlier in the decade.

From a macro perspective, this gradual stabilisation is constructive. Housing becomes less of a drag on growth without becoming a renewed source of inflation.

The Balance of Risks in 2026

The main risk to the outlook is not an imminent recession, but misalignment between expectations and reality. If markets assume a rapid return to very easy monetary conditions, valuations may become vulnerable. Conversely, if inflation surprises on the upside through housing or energy, central banks may need to maintain restrictive settings for longer than currently expected.

This makes 2026 less about dramatic turning points and more about balance. Growth is steady but constrained. Inflation is falling but persistent in pockets. Policy is flexible but cautious.

Closing Thoughts

The post-inflation world will not look like the low-rate decade that preceded it. Nor does it resemble the shock-driven environment of the past few years.

Instead, 2026 is shaping up as a period of normalisation. Economic outcomes are driven less by emergency policy and more by structural realities, supply constraints, and productivity. Markets reward selectivity and discipline rather than broad macro positioning. Housing remains supported by fundamentals, even as affordability becomes a central social and political issue.

It is a quieter phase of the cycle, but not an unimportant one.

Much of what unfolds over the next few years will be determined not by new shocks, but by how economies adapt to the existing conditions.

Sources:

ABC News (2025) RBA keeps rates on hold, ‘uncomfortable’ with inflation at current level, 9 December. Available at: https://www.abc.net.au/news/2025-12-09/rba-interest-rate-decision-december-2025/106120130

Federal Reserve (2025) Summary of Economic Projections, December. Board of Governors of the Federal Reserve System. Available at: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20251210.htm

Federal Reserve Bank of Atlanta (2025) Bostic, R., FOMC’s credibility on inflation could be at stake, 16 December. Available at: https://www.atlantafed.org/about/atlantafed/executive-leadership-committee/bostic-raphael/message-from-the-president/archive/2025/12/16/fomcs-credibility-on-inflation-could-be-at-stake

International Monetary Fund (2025) World Economic Outlook: Global economy in flux, prospects remain dim, October. Washington, DC: IMF. Available at: https://www.imf.org/en/Publications/WEO/Issues/2025/10/14/world-economic-outlook-october-2025

Nuveen (2025) Fed update and 2026 outlook, December. Available at: https://www.nuveen.com/global/insights/investment-outlook/fed-update

Realestate.com.au (2025) Property prices tipped to break records in 2026 despite RBA pause, December. Available at: https://www.realestate.com.au/news/property-prices-tipped-to-break-records-in-2026-despite-rba-pause/

Redfin (2025) Redfin’s 2026 housing predictions: The great housing reset. Available at: https://www.redfin.com/news/housing-market-predictions-2026/

Reserve Bank of Australia (2025) Statement on Monetary Policy, November. Sydney: RBA. Available at: https://www.rba.gov.au/publications/smp/2025/nov/

Reserve Bank of Australia (2025) Cash rate target. Available at: https://www.rba.gov.au/statistics/cash-rate/

S&P Global Market Intelligence (2024) Rate check: Tech investors look to 2025 as rate cut delays and AI drives 2024. Available at: https://www.spglobal.com/market-intelligence/en/news-insights/research/rate-check-tech-investors-look-to-2025-as-rate-cut-delays-ai-rock-2024

Zillow Research (2025) 2026 housing market predictions. Available at: https://www.zillow.com/research/2026-housing-predictions-35800/