CBA revises its economic outlook, pointing to one surprising factor now weighing more heavily on Australian growth than the other
Halfway through 2026, the Australian economy is losing pace, and Commonwealth Bank of Australia's (CBA) economics team says the reasons behind the slowdown have shifted since March.
A research team headed by CBA’s head of Australian economics Belinda Allen said the fallout from the Iran conflict has proven far milder than first feared, but a deteriorating housing market has emerged as the more persistent drag on household spending.
Iran conflict fades as a threat
Four months ago, CBA's central scenario assumed Brent crude would hold near $US120 a barrel for three months. Instead, oil averaged $US97 ($136) a barrel over the three months to 30 June, with a Memorandum of Understanding between the US and Iran and the reopening of the Strait of Hormuz easing the worst-case outcomes.
A 32-cent cut to the fuel excise tax further insulated household budgets, and petrol's share of consumer spending has reverted close to pre-conflict levels.
As a result, CBA now expects headline inflation to peak at 4.1%, well below its earlier 5.4% estimate, with CBA noting that "some of the more severe inflation scenarios considered in the immediate aftermath of the conflict now appear much less likely”.
Housing becomes the bigger drag
But residential property has come to crash the party. CBA has downgraded its dwelling investment forecasts, citing softer established home prices, a broader deterioration in market sentiment and higher construction costs stemming from the earlier conflict-driven cost pressures.
Sydney values fell 1.2% in June and 3.2% over the quarter, while Melbourne dropped 1% in the month and 2.6% over the quarter – the largest one-month declines in both cities since August 2022. Auction clearance rates have also tracked below 50% for five straight weeks.
Read more: National home values post sharpest monthly fall since late 2022
Much of that shift in sentiment traces straight back to Canberra. The government's tax reform package, which cleared both houses in June, overhauled the old capital gains tax (CGT) discount and negative gearing settings to make them far less generous to property investors.
On top of that, the Greens used the negotiations to secure a ban on new SMSF borrowing for residential property. It's a small corner of the market, but as MPA's coverage of the SMSF lending ban notes, it's closed off a strategy some investors had been leaning on.
Combined, these changes appear to be feeding the caution now showing up in buyer behaviour.
CBA also flagged a well-established "wealth effect”, where falling housing values curb consumer spending independent of income growth. Despite an upgrade to real household income forecasts – driven by stronger wage growth following the Fair Work Commission's Award Wages decision and a smaller inflation drag from lower fuel prices – CBA expects this benefit will be largely offset by softening housing wealth. National dwelling investment is forecast to turn slightly negative by the first quarter of 2027.
For originators and lenders watching the established housing market, the read-through is that softer prices, rather than geopolitical risk, are now the primary constraint on borrower sentiment and new-build activity.
Growth, jobs and inflation: the numbers
CBA has trimmed its GDP growth forecast to 1.5% by the end of 2026, before a recovery to 2% by the end of 2027, aided by a stronger business investment cycle tied to data centre construction. The labour market is expected to soften in step, with unemployment forecast to peak at 4.8% in late 2027, up from 4.4% in May 2026, as employment growth slows to a trough of 1% year-on-year in the first quarter of 2027.
On inflation, CBA does not expect a return to the top of the Reserve Bank of Australia's (RBA) target band until mid-2027, with the midpoint not reached until early 2028.
Rates on hold through 2026
CBA maintains its view that the RBA will hold the cash rate steady for the rest of 2026, following three rate rises earlier in the year. Board minutes released in June flagged a continued tightening bias, with the RBA stating it would keep increasing the cash rate target further if required should conditions demand it. CBA sees this as a live but secondary risk to its base case.
Beyond 2026, CBA expects two rate cuts in 2027, timed most likely for May and August, contingent on inflation showing a sustained decline. The bank also flagged a governance factor to watch: Monetary Policy Board member Ian Harper's term expires on 31 August 2026, and CBA judges him to sit on the more hawkish side of the board, meaning his replacement could influence the RBA's future reaction function.
The longer-term picture
CBA's report also points to structural shifts reshaping the economy beyond the current cycle, including a data centre investment boom worth an estimated $150–220 billion, growing defence spending, changes to the National Disability Insurance Scheme (NDIS), and the ongoing renewable energy transition. The bank expects GDP to lift to 2.2% by the end of 2028, supported in part by broader AI adoption.
