NSW particularly sensitive to interest rate rises, Treasury says

The internal state Treasury paper says NSW’s relatively high house prices and the larger share of mortgagees’ income spent on servicing loans make it particularly sensitive. The share of average household earnings needed to service a new mortgage on a median-priced home has reached 30.7 per cent, the highest in 32 years and far above any other state.

The Reserve Bank has already raised rates four times this year in an effort to combat elevated inflation. Another 0.25 percentage point increase would take the cash rate to 4.85 per cent, the highest in 18 years.

Premier Chris Minns said on Monday that another rate rise would have a 'massive' impact on the state. 'There'll be jobs that go that will never come back, there'll be shops that close that do not reopen with another rate rise,' he said.

Treasury modelling estimated that a one percentage point increase in rates held over three years would leave dwelling investment in NSW 3 per cent lower than otherwise, double the estimated 1.5 per cent fall in the rest of Australia. Dwelling commencements in the state were estimated to fall by 2.5 per cent, compared with 1 per cent elsewhere.

Treasurer Daniel Mookhey said Labor was seeking a mandate to fight inflation at the state election next year. 'Higher interest rates hit NSW families hardest,' he said. The government's debt reduction plan would cut $11 billion in debt and save $275 million a year in interest, backed by a legislated debt ceiling.

The impact is already visible in the property market. Domain data shows Sydney’s median house price has fallen about 8 per cent since December to $1.66 million, though it remains $509,000 higher than Brisbane, Australia’s second most expensive city.

The state’s unemployment rate jumped from 4 per cent in June to 4.7 per cent in September, the worst since November 2021 and already above the state government’s forecast for this financial year. The state budget forecast the NSW economy to grow just 1 per cent this financial year and next, less than half the rate expected before the latest rate increases.

The economic hit from higher rates is also damaging the state’s finances. Forecast stamp duty revenue was cut by $5.3 billion in the June budget, and Mookhey warned last week that write-downs of a similar magnitude were likely to be included in the half-yearly budget review next month. Weaker revenue is likely to worsen the state’s predicted budget deficit of $2.3 billion for 2026-27, which follows seven consecutive years in the red.