How the Interest Rate Trend Will Impact Australia’s Property Market in 2025

Australia’s property market has endured a turbulent few years, shaped largely by interest rate volatility, inflation, and supply chain constraints. As we approach the midpoint of 2025, stability is returning, and with it comes renewed investor and buyer interest, particularly as expectations mount for interest rate cuts in the latter half of the year.

Where the Market Stands Now

Following a cyclical downturn in 2022–2023, the Australian residential market is showing signs of life:

• National housing values have begun to rise modestly, with CoreLogic reporting a 2.3% increase in Q1 2025.

• Demand remains resilient in Sydney, Brisbane, Perth, and Adelaide, while Melbourne and Canberra lag slightly behind.

• Rental yields are at multi-year highs, buoyed by tight vacancy rates (~1%) and record immigration levels.

• Dwelling approvals remain constrained, with developers cautious amid high construction costs and elevated financing rates.

While affordability remains a challenge, there’s a sense that the worst may be behind us, particularly if interest rates begin to ease.

Key Rate-Driven Impacts on the Property Market

1. Improved Buyer Sentiment

A downward shift in interest rates will boost buyer confidence—especially for first-home buyers, who have been sidelined by high mortgage serviceability hurdles. A lower cash rate means:

• Reduced mortgage repayments

• Higher borrowing capacity

• Increased demand for entry-level and middle-tier properties

2. Renewed Investor Activity

With cash rates peaking and rental yields high, property is once again becoming attractive to investors, particularly:

• Local investors chasing yield and capital gains

• SMSFs and trust structures looking for long-term residential exposure

• Foreign buyers, especially from Asia, drawn by a stable market and currency weakness

3. Capital Growth to Resume in Select Markets

Property values are expected to grow between 3–6% nationally in 2025, though gains will be uneven. Likely outperformers include:

• Brisbane and Perth: buoyed by population growth, infrastructure spending, and relative affordability

• Middle-ring suburbs in Sydney and Melbourne: where supply remains constrained

• Regional lifestyle markets: those with good connectivity and amenity, though some have already peaked

4. Developer and Construction Sector Rebound

Rate cuts will ease funding costs for developers and help unlock previously stalled projects, particularly in:

• Medium-density housing

• Build-to-rent (BTR) models

• Social and affordable housing tied to government stimulus

However, cost pressures and planning delays remain a challenge, and activity may recover slowly rather than rebound sharply.

5. Commercial Property Outlook

For the commercial sector, especially office and industrial, rate cuts will help stabilise cap rates and improve valuations. However:

• Office demand remains mixed due to hybrid work

• Industrial continues to be the standout performer, driven by e-commerce and logistics

• Retail is bifurcated, with neighbourhood centres outperforming discretionary large-format assets

Risks to Consider

• Inflation resurgence: Any surprise uptick in inflation could delay or derail the rate cut cycle.

• Regulatory tightening: APRA or ASIC could implement tighter lending standards, especially if investor demand spikes.

• Labour market deterioration: Rising unemployment could weigh on sentiment and spending.

• Geopolitical risks: Global instability or supply shocks could impact Australian economic conditions.

Conclusion

The anticipated shift in interest rate policy marks a turning point for the Australian property market. While recovery is likely to be modest and uneven, the combination of easing monetary policy, strong population growth, and persistent undersupply is setting the stage for a gradual but meaningful rebound.

At 1989 Capital, we are closely tracking the data and positioning our clients to capitalise on this inflection point, whether through residential acquisitions, strategic developments, or credit opportunities aligned with the changing rate environment.