Interest rates and inflation are hot topics when it comes to the Australian property market in 2025 and as the year draws to a close, experts say all eyes will be on these topics in the coming year.
Angus Moore, executive manager of economics at REA Group, said the three rate cuts delivered over the course of 2025 were a key driver of market activity, helping to reduce mortgage costs from the cyclical peak reached in 2024.
“That said, interest rates are clearly still a lot higher than they were a few years ago, and that still makes housing affordability a big challenge,” he said.
“But the fact that we’ve seen some cuts has supported house price growth, particularly in Sydney and Melbourne. Both cities – especially in 2024 – have been quite sluggish.
“But this year, both cities have grown consistently, and the fact that we’ve seen rate cuts is a big part of that.”
All eyes on inflation
The latest release from the Australian Bureau of Statistics shows that the Consumer Price Index (CPI) grew by 3.8% in the 12 months to October 2025, up from 3.6% in the 12 months to September 2025. This means it is well outside the Reserve Bank of Australia’s (RBA) target of 2-3%.
Shane Oliver, AMP’s head of investment strategy and chief economist, said the latest CPI data was worrying and opened up the possibility that further rate cuts were approaching bottoming.
“We started the year with a degree of optimism that interest rates could fall, and now these expectations have been dashed to some extent,” he said.
“That is a kind of limitation on the residential market, and possibly also on the commercial real estate market.”
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PropTrack economist Angus Moore.
Moore said that because inflation is higher than what the RBA wanted, rate cuts would likely be suspended for the foreseeable future.
“The RBA now expects that underlying inflation is likely to still be slightly above their target range early next year,” he said.
“As a result, this delays the likelihood of another cut until early to mid next year. But it is certainly not a guarantee.”
Government incentives are helping buyers
Mr Oliver said the Australian government had expanded its activities Home guarantee scheme – allowing 5% deposits – will to some extent offset the negative impact of fewer interest rate cuts.
“It clearly brings out the demand from first home buyers… It significantly reduces the amount of time it takes for people to put down a deposit,” he added.
“So it could have the effect of bringing demand to the fore, especially at a time when the residential rental market is still quite tight.”
Since October, first home buyers have been able to enter the market with a 5% deposit.” Photo: Getty
Mr Moore said that while it is too early to gauge the impact of the stimulus measures, the just-released government data suggested there has been an increase in take-up of the programme, in line with their expectations.
“There’s obviously a time lag between signing up for the program and finding a house, and that’s reflected in the activity and house prices, so it’s probably a bit too early to really read about it.”
Loan approvals are increasing and investor impact is increasing
The number of loans approved for new residents in the September quarter totaled 83,846, an increase of 2% (1,606 loans) compared to the previous quarter, and an increase of 1.7% over the year.
Total value was $58.2 billion in the September quarter, up 4.7% ($2.6 billion).
The data also showed that the average loan size grew by $15,873 to $693,801 during the September quarter.
The increase in loans was led by New South Wales (4.9%), Victoria (2.4%) and the Australian Capital Territory (6.7%).
The value of new investment loans reached $39.8 billion in the September quarter. Photo: Getty
Meanwhile, 57,624 new investment loans were approved during the quarter, an increase of 13.6% (6,906 loans) compared to the previous quarter, and growth of 12.3% year-on-year.
The value of new investment loans reached $39.8 billion in the September quarter, up 17.6% ($6.0 billion).
The data also showed that the average loan size increased by $11,686 to $685,634 during the quarter.
Mr Moore said investors have been a major part of housing market activity in recent years and this will continue into 2025.
“What that means is that the share of loans currently going to investors is near or at record highs in some states,” he said.
“In South Australia and the Northern Territory it is at a record high, in Western Australia and Queensland it is slightly off, but not by much. New South Wales is at quite a high level and is the highest since 2017.
Particularly in Victoria, where there hasn’t been much investor activity and has been lower than other states, interest rates rose relatively sharply in the September quarter, he said.
An upturn in consumer confidence
As the year draws to a close, new research shows that consumer confidence is on the rise.
The Westpac-Melbourne Institute’s Consumer Sentiment Index rose 12.8% to 103.8% in November, marking the first positive reading since early 2022.
A score above 100 means that there are more optimistic consumers than pessimistic consumers.
Consumer confidence has increased in recent months. Photo: Getty
The report noted that sentiment overall was still only marginally positive and not strongly optimistic.
“However, this move draws a clearer line under what had been a long period of consumer pessimism, when disposable incomes were hit hard by a combination of high inflation, high interest rates and rising tax payments,” the report said.
“Much of the improvement in sentiment in November comes from a significantly more confident assessment of the outlook for the economy.”
House price predictions for 2026
The three rate cuts in 2025 have already supported home prices, Moore says, and will continue to do so next year, although not as much if inflation had been further controlled.
While this year has seen a “resurgence in the market”, Mr Oliver agrees that 2026 is likely to bring continued strength in property price growth of around 8%.
“Price growth will remain strong, but I don’t see any further acceleration and there will be a boost from the housing shortage and the influx of first-time buyers, but that will be partly offset by fewer interest rate cuts than previously expected,” he said.
“And by the time we get to the second half of next year, there will be more discussion about when the first rate hike could come.”
This article first appeared on Mortgage Choice and is republished with permission.
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