The reason why a rate rise will hurt Sydneysiders most

NSW is being hit disproportionately hard by rising interest rates as the state’s new home borrowers face the nation’s highest mortgage repayments and housing investment falls more than in other parts of the country.

As borrowers brace for the fifth rate hike this year on Tuesday, an internal NSW Treasury paper says the state is “particularly sensitive” to rate increases because house prices are relatively high and a larger portion of mortgagees’ income is spent on servicing their loan than in other states.

The share of average household earnings needed to service a new mortgage on a median-priced home has reached 30.7 per cent in NSW – far more than in any other state and the highest level in the 32-year history of the data series.

The larger mortgage payment burden on NSW households affects economic activity across the state.

The Reserve Bank has already lifted interest rates four times this year to combat elevated inflation and is expected to deliver a fifth rate hike after its monetary policy board meets on Tuesday. Another 0.25 per cent increase will push the bank’s official cash rate to 4.85 per cent – the highest in 18 years.

Premier Chris Minns warned on Monday another rate rise will have a “massive” impact on NSW.

“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.

The state Treasury paper found interest rate increases have a larger impact on housing investment in NSW compared to the rest of Australia.

When Treasury modelled the impact of a 1 percentage point increase in official interest rates that is held over three years, it showed NSW dwelling investment would be 3 per cent lower than otherwise between mid-2026 and mid-2029. But for the rest of Australia, dwelling investment is estimated to be only 1.5 per cent lower than otherwise over that period.

Under the same scenario, dwelling commencements in NSW were estimated to fall by 2.5 per cent, while in the rest of Australia the decline would be 1 per cent.

The modelling showed the impact of a 1 percentage point increase in rates held over three years also drives property prices down further in NSW than in other states.

Treasurer Daniel Mookhey said Labor was “seeking a mandate to fight inflation first” at next year’s state election to help take pressure off interest rates.

“Higher interest rates hit NSW families hardest,” he said.

“We’re showing voters respect by taking our debt reduction plan to the election: $11 billion less debt and $275 million a year saved in interest, backed by a legislated debt ceiling.”

The series of rate increases this year has triggered a sharp property downturn – Domain data shows Sydney’s median house price has fallen by about 8 per cent since last December to $1.66 million.

But that median house price is still $509,000 – or 44 per cent – higher than Australia’s second most expensive city, Brisbane (with a median price of $1.15 million).

The economic hit from higher rates is also damaging the state’s finances.

The forecast for stamp duty revenue was slashed by $5.3 billion in the June budget due to the downturn in the property market.

But 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.

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