Trade wars, stagflation and recession: How global economics could affect your mortgage

While housing undersupply continues to support long-term growth, shifting global economic conditions-including the potential return of President Trump’s trade war-could have a significant impact on interest rates and mortgage affordability.

According to Nerida Conisbee, chief economist at Ray White Group, three key scenarios could unfold over the next 12 months, each with different implications for homebuyers, investors, and sellers.

Scenario 1: Global economic slowdown and lower interest rates

If the United States enters a recession and global growth weakens, central banks - including the Reserve Bank of Australia -are likely to cut interest rates further to stimulate economic activity.

“If global economic conditions deteriorate, we could see the three additional rate cuts that markets are currently expecting become a reality,” Ms Conisbee said.

“Lower interest rates would increase borrowing power, which could push property prices higher as buyers compete for limited housing stock.”

However, while lower mortgage repayments might make home-ownership seem more affordable, Ms Conisbee warns that prices could rise faster than incomes, making it harder for new buyers to enter the market.

“We may see first-home buyers benefiting from lower repayments, but they’ll be purchasing at higher prices. Investors could also return in force, seeing property as a safe-haven asset compared to volatile share markets,” she said.

If rates drop further, borrowing power will rise, which is likely to push property prices even higher.

First-home buyers may benefit from lower repayments in the short term, but they will have to stretch their budgets further as home prices continue to increase.

Investors, meanwhile, may see property as a safer bet than stocks and re-enter the market, driving up competition even further.

Scenario 2: Higher tariffs and rising interest rates

If President Trump escalates trade tensions by imposing higher tariffs on China, inflation could rise significantly.

In response, the RBA may be forced to hike interest rates instead of cutting them, despite current market expectations.

A renewed trade war would push up the cost of goods and services, leading to higher inflation.

“In this scenario, central banks, including the RBA, would need to respond by increasing interest rates rather than cutting them,” Ms Consibee said.

With higher mortgage costs and reduced borrowing capacity, Australian house price growth would likely slow. Buyers may hesitate, and properties could sit on the market longer before selling.

“We wouldn’t see house prices crash due to ongoing under-supply, but the pace of price growth would slow down considerably,” she explains.

“In this environment, buyers would have more negotiating power, and we’d see a shift away from the strong seller’s market we’ve had over the past few years.”

Higher mortgage repayments would make borrowing more expensive, limiting the number of buyers who can afford to enter the market.

With fewer buyers actively searching, the real estate landscape could shift in favour of those who are financially prepared to purchase, giving them greater bargaining power.

While the ongoing housing shortage would prevent property values from plummeting, price growth would be significantly slower than in previous years.

Scenario 3: Stagflation and China’s potential economic slowdown

The worst-case scenario for Australia’s property market would be a combination of high inflation and weak economic growth.

Classic stagflation - paired with a Chinese economic downturn.

“If the Chinese economy slows significantly, demand for Australian resources will fall, which could hurt mining-dependent states like Western Australia and Queensland,” Ms Conisbee said.

“This could lead to job losses and population shifts, putting pressure on property prices in those regions.”

At the same time, high inflation and stagnant wage growth would make it harder for buyers to save for deposits or qualify for home loans.

“High-end properties in major capital cities would likely hold their value due to continued demand, but we’d see much weaker conditions in outer suburban and regional markets,” Ms Conisbee added.

“Rental markets could also become more challenging as investors reconsider their returns against rising costs.”

For property buyers, this would create a highly divided market.

Wealthier suburbs in major cities would likely continue to attract demand, while outer suburbs and resource-reliant areas could see a decline in prices due to job losses and reduced migration.

Inflationary pressures would also make it more difficult for households to save for a home deposit, potentially delaying homeownership for many Australians.

Meanwhile, the rental market could experience increased pressure as investors weigh up whether higher property costs still make real estate a viable investment.

What should homebuyers do?

Despite these uncertainties, Ms Conisbee advises buyers to focus on long-term affordability rather than trying to time the market.

“The housing market is incredibly adaptable, as we saw with the swift rebound in January 2025 after just one month of price declines. Whether interest rates fall, rise, or hold steady, Australia’s ongoing housing under-supply means property prices are likely to remain supported over the long term,” she said.

For buyers, the key takeaway is that the right time to buy depends on individual circumstances.

“If interest rates fall, competition will increase, and prices will rise. If rates increase, buyers will have more negotiating power, but borrowing capacity will be lower.

“Understanding these factors will help homebuyers navigate the market in 2025.”