Australian Property Market Update: Good News for Property as Inflation Drops and Interest Rate Cuts on the Horizon

Here's some great news – inflation has finally dropped below the RBA's target for the first time in three years, while property values increased for the third consecutive month. With interest rate cuts likely coming soon, this could be a smart time to consider your property options.

What's Happening Right Now

As Australia heads toward a federal election and likely RBA rate cuts, the property market is at a turning point that could benefit both current and future homeowners. According to Cotality's latest data, home values grew by 0.3% in April, adding around $2,720 to the median value of an Australian home. Even better news – underlying inflation has dropped to 2.9%, falling within the RBA's target band for the first time since 2021.

This improvement in both housing and economic conditions comes during a time when both buyers and sellers seem to be taking a cautious approach – auction clearance rates and transaction volumes show signs of pre-election hesitation. But here's the kicker – markets are now pricing in a 98% chance of a rate cut on May 20, with potential for multiple additional cuts throughout 2025. This could create ideal conditions for property investment before these rate cuts fully impact the market.

"With inflation now within the RBA's target band for the first time since 2021, significant rate cuts appear to be a certainty. The combination of 0.3% dwelling value growth in April, rental yields at two-year highs, and developer data showing new home prices up 17% year-on-year signals we're moving into the next phase of the market cycle," says Godfrey Dinh, CEO of Futurerent. "This creates a unique window of opportunity for investors who act before the expected 4-5 rate cuts fully flow through to the market. We're already seeing early signs in the development sector with Mirvac sales up 76% and Stockland reporting their highest quarterly sales in three years. Market conditions are now perfectly positioned for strong growth through 2025."

Key Points to Know

• The RBA's preferred measure of underlying inflation has dropped below 3% for the first time in more than three years
• Bond traders expect a quarter-point rate cut to 3.85% at the RBA's May 20 meeting
• The Australian dollar climbed 0.5% to US64.10¢, approaching a five-month peak
• Cotality's national Home Value Index showed a third straight month of growth in April, with dwelling values up 0.3%
• Every capital city saw an increase in home values during April, ranging from 1.1% in Darwin to 0.2% in Sydney and Melbourne
• National gross rental yield reached a two-year high in April at 3.73%
• Stockland reports new home prices have risen 17% from a year ago
• Mirvac residential sales up almost 80% compared to the same period last year
  
  

New Home Market Shows Strength Despite Cautious Sentiment

While auction activity has been somewhat slow, the new home market is showing remarkable resilience with significant price growth over the past year. Major developers are sharing promising figures:

ASX-listed Stockland has reported:

• 6,232 signed contracts at the end of March – up from 5,565 a year earlier
• New home prices sold over settlement values increased by 17% in the first half
• Net sales of 1,509 homes over the quarter – the highest quarterly total in almost three years

Mirvac is also performing well:

• Residential lot sales up 76% compared to the same quarter last year
• Residential pre-sales rose to approximately $2.1 billion in the quarter

Mirvac's chief executive Campbell Hanan noted they are "ready to take advantage of any pick-up in market activity, with supportive government housing policy and a positive outlook for interest rates."

Inflation Drop Opens Door to Multiple Rate Cuts

In a significant development for the Australian economy, the Reserve Bank's preferred measure of underlying inflation has finally dropped below 3% for the first time in more than three years. This important economic indicator cooled to 2.9% in the March quarter from 3.3%, bringing it within the RBA's 2% to 3% target range.

This inflation result has essentially cleared the path for what now looks like an inevitable interest rate cut after the federal election. Bond traders fully expect the central bank to reduce the cash rate by a quarter-point to 3.85% at its May 20 meeting.

"This is a significant further improvement from prior periods and should keep the RBA on track to continue cutting rates in May," said Charlie Jamieson, chief investment officer at Jamieson Coote Bonds. The bond fund manager expects at least three cuts by Christmas.

EY senior economist Paula Gadsby added that "with headline and underlying inflation finally sitting within target, the RBA had an opportunity to loosen monetary policy at its May meeting. Further cuts to bring the cash rate closer to a more neutral position are likely this year."

Financial markets have adjusted their expectations accordingly:

• Money markets now imply a 98% chance of a standard 0.25 percentage point cut to 3.85% at the RBA's next policy meeting
• Markets have reduced expectations of a larger half-point reduction to less than one-in-ten chance
• The Australian dollar climbed 0.5% to US64.10¢, nearing a five-month peak

For those considering property investment, this shift in monetary policy could present a significant opportunity. Markets are currently pricing in approximately four to five additional rate cuts by the RBA this year, following its initial rate reduction in February. Such substantial easing would improve buying power, enhance investment returns, and stimulate activity across all segments of the property market.

Could We See a Larger Rate Cut?

While most economists predict a standard quarter-point reduction, some market observers have raised the possibility of a more aggressive approach. The cash rate is currently 4.10%, and the RBA has lowered its estimate of what would constitute a neutral setting for monetary policy to under 3%, which could leave room for more substantial action.

"Given the cash rate is now 4.10%, this suggests that the RBA board could deliver a 50 basis point cut in May and still leave policy mildly restrictive," according to economic analysis from the available data.

This perspective is supported by three key factors suggesting demand is continuing to slow relative to the economy's capacity to grow:

1. Progress on inflation control is evident but incomplete, with annual underlying inflation stalling at 2.7% for March
2. The tightness in the labor market is gradually loosening, with unemployment rising slightly to 4.1% in the March quarter
3. The gap between economic demand and supply is closing, reducing the need for such restrictive monetary policy

However, some economists remain cautious about the potential for a flurry of rate cuts. While inflation has declined to within the RBA's target range, inflation over the past three months was slightly higher than market expectations and picked up from a low point in the December quarter. This suggests the RBA might take a more measured approach to future rate reductions.

Housing Values Continue Rising Despite Market Uncertainty

Australia's housing market showed remarkable resilience in April, with Cotality's national Home Value Index recording a third consecutive month of growth. Dwelling values increased by 0.3% to reach a new record high, adding approximately $2,720 to the median Australian dwelling over the month.

Every capital city recorded growth in April, from Darwin's leading 1.1% gain to Sydney and Melbourne's modest 0.2% increases. While still positive, the national growth pace eased slightly from March's 0.4%.

Change in dwelling values, 30th April 2025

Source: Cotality (previously known as CoreLogic)

Tim Lawless, Cotality's research director, explained: "The February rate cut supported an upwards inflection in housing conditions, but the positive influence from lower rates seems to be losing potency. Household confidence slipped in April, with US tariff announcements and the upcoming federal election causing uncertainty."

This uncertainty has created a difference between prices and transaction volumes. While values continue rising, listings and sales have slowed significantly. As Lawless noted, "These uncertainties are more apparent in sales volumes compared to home values – a trend compounded by the 'super break' many Australians took between Easter and ANZAC public holidays."

Looking ahead: "With further rate cuts likely as soon as May 20th, and certainty returning after the federal election, we expect a further modest rise in values for 2025," predicted Lawless.

Despite the positive trend, several markets remain below their previous peaks:

• Sydney values are 1.1% below their September 2024 high
• Melbourne values remain 5.4% below their 2022 peak
• Hobart (11.1%), Darwin (2.7%) and ACT (6.4%) all sit below their all-time highs

Houses continue doing better than units despite stretched affordability, with values rising 1.1% across combined capitals over three months, more than double the unit sector's 0.5% lift.

Rental Market: Yields Reach Two-Year High as Growth Stabilizes

The rental market is showing signs of stabilization while yields strengthen to multi-year highs, creating increasingly favorable conditions for income-focused investors.

The national rental index has risen by 0.6% consistently over the past three months, with a seasonally-adjusted 0.4% for April. This moderation is more evident in annual figures, with growth more than halving from 8.3% (April 2024) to 3.6% over the most recent 12 months.

Most capitals have recorded a substantial reduction in rental growth pace:

• Perth leads with 5.7% annual growth, down from 13.6% a year ago
• Melbourne's growth has eased from 9.4% to just 2.0%
• Sydney rents are rising at 1.9% annually, the slowest increase since April 2021

In contrast, Hobart has seen a remarkable turnaround, with rental growth rising to 5.4%, up from -0.3% a year ago. Darwin's rental market has also gained momentum, increasing from 3.2% to 5.0% annual growth.

Gross rental yields, dwellings

Source: Cotality (previously known as CoreLogic)

For investors, the most encouraging development is yield improvement. With rents outpacing housing values, the national gross rental yield reached a two-year high in April at 3.73%. Regional Australia continues offering higher yields at 4.41%, while combined capital city yields have improved to 3.52%, the highest in eleven months.

This yield enhancement comes at a strategically important time as the anticipated rate-cutting cycle would further improve the relative attractiveness of property investment returns compared to fixed-income alternatives.

Auction Results Show Caution Among Buyers and Sellers

The auction market demonstrates a more measured pace of activity, reflecting a combination of seasonal factors, election uncertainty, and buyer caution. Last week's results provide important insights into current market dynamics:

• 1,080 auctions were held across combined capital cities, up from 644 during the Easter long weekend but substantially down from 1,964 at this time last year
• The preliminary auction clearance rate declined to 64.2% - the lowest preliminary clearance rate since mid-December 2024
• Melbourne was the busiest auction market with 472 auctions returning a preliminary clearance rate of 67.6%
• Sydney hosted 398 auctions with a preliminary clearance rate of 66.2%
• Brisbane recorded the lowest preliminary clearance rate (47.1%) since April 30th, 2023

Auction Clearance Rates

Source: Cotality (previously known as CoreLogic)

The trend in auction clearance rates has been gradually easing since the week ending February 23rd, when the preliminary clearance rate reached 72.1% following the 25-basis point rate cut on February 19th.

Melbourne-based buyer's advocate Emma Bloom of Morrell & Koren noted: "Everyone is crossing their fingers that the market will change after the election. Whether it's a change of government or a rate cut, something has got to give. It's always cyclical, and it's a matter of who is going to make the first move – buyers stepping up or sellers reducing their price."

Growing Gap Between Supply and Demand Supports Price Growth

When you look at the numbers, Australia's housing situation clearly favours those who already own property. The difference between what we need and what we're building keeps getting bigger, not smaller. This ongoing mismatch creates strong support for property values to keep rising and gives current property owners a significant advantage.

Recent figures highlight just how pronounced this supply-demand imbalance has become:

• Construction of medium and high-density homes contracted by 4.4% in the final quarter of 2024, marking the weakest performance since 2011
• Immigration has rebounded strongly, with net overseas arrivals reaching 155,000 in just the first two months of 2025
• Experts now estimate Australia's accumulated housing deficit at approximately 300,000 dwellings across a five-year timeframe
• Building costs remain elevated with the Cordell Construction Cost Index recording 4.7% annual growth – significantly above the decade-long average of 3.4%

Cordell Construction Cost Index

Source: Cotality (previously known as CoreLogic)

Property industry stakeholders report that new development feasibility now requires price points 15-20% above current levels to become economically viable. This creates what economists term a "positive feedback loop" for existing property values, as new supply remains constrained while population-driven demand continues to strengthen.

The visual data tells a compelling story – historical charts show population growth (orange line) consistently outstripping dwelling approvals (blue line) over multiple decades. This entrenched pattern of undersupply continues to strengthen the investment case for residential property, particularly in established areas where development opportunities are limited by geography or regulation.

Population Growth vs Dwelling Approvals

Source: Cotality (previously known as CoreLogic)

Rental Market: Sustained Strength Supports Investment Returns

The Australian rental landscape continues to provide excellent conditions for property investors, with multiple indicators confirming the ongoing imbalance between tenant demand and available rental stock. This fundamental market dynamic creates steady income security and supports overall investment returns.

Recent data highlights the extraordinary tightness in rental conditions:

• Vacancy rates have compressed further to just 1.6% nationally – a figure hovering just above all-time lows
• Available rental listings continue to track 22.1% below long-term historical averages
• The five-year rental growth story remains remarkable, with national rents having appreciated by 38.4% since March 2020
• This translates to an additional $182 weekly income (or $9,442 annually) for the average investment property

These strong rental fundamentals provide investors with significant advantages: better cash flow, reduced vacancy risk, and greater capacity to handle potential interest rate fluctuations. The rental component of investment returns has become increasingly valuable in the current environment.

Affordability metrics reveal tenants now allocate approximately 32.9% of their income toward rental payments – an increase from the historical norm of 29.0%. While this presents challenges for renters, it also indicates continued capacity for rental growth in markets where income growth remains positive.

Housing Affordability - National Data

Source: Cotality (previously known as CoreLogic)

Electoral Policies Promise Market Stimulus

As Australia approaches its federal election, housing affordability has emerged as a central campaign battleground. Both major political parties have unveiled ambitious policy packages aimed at addressing housing challenges – initiatives that market analysts believe will stimulate property activity and support price growth regardless of the election outcome.

The competing policy approaches offer distinct mechanisms for market intervention:

Labor's Blueprint: Supply-Side Focus

• Ambitious commitment to deliver 100,000 new homes, targeting the structural undersupply that has constrained the market
• Significant expansion of the 5% deposit scheme, with eligibility extended to properties valued up to $1.5 million in key markets
• Enhanced price caps in capital cities increasing the range of eligible properties

Coalition's Approach: Financial Engineering

• Innovative tax deductibility proposal for owner-occupier mortgages on newly constructed properties
• Superannuation access reform allowing first-home buyers to withdraw up to $50,000 from retirement savings
• Potential reduction in APRA's mortgage serviceability buffer to expand borrowing capacity

Independent property analysts examining these competing platforms have reached similar conclusions – implementing either party's policies is likely to drive property values higher by 8-15% in the twelve months following enactment.

While these measures primarily target first-home buyers and owner-occupiers, the flow-on effects for property investors are overwhelmingly positive. The policies will stimulate broader market activity, enhance buyer confidence, and support overall valuation growth – all without directly competing with investor activity in established markets.

What This Means for You: Investment Strategies to Consider

The combination of cooling inflation, expected rate cuts, rising dwelling values, and strengthening rental yields creates some interesting opportunities if you're thinking about property investment in 2025:

1. Consider Acting Before Rate Cuts Take Full Effect

With rate cuts expected starting May 20 and markets pricing in four to five additional reductions this year, securing a property before these monetary shifts take full effect could help you benefit from both improved affordability and subsequent value appreciation.

2. Look at Supply-Demand Fundamentals

The continued strength in new home pricing (up 17% year-on-year according to Stockland) suggests persistent demand despite current interest rates. As interest rates fall, this underlying demand could translate into broader market growth, particularly in areas where supply is limited.

3. Think About House vs. Unit Strategy

With houses performing better than units (1.1% vs 0.5% quarterly growth across capital cities), you might need to refine your buying strategy. While houses offer stronger capital growth prospects, units may present better value and yield opportunities in certain markets.

4. Consider Post-Election Timing

As Emma Bloom noted, "Everyone is crossing their fingers that the market will change after the election." This sentiment reflects the pattern of held demand being released following electoral cycles, creating potential for increased activity once political uncertainty resolves.

5. Focus on Yield Potential

With national gross rental yields reaching a two-year high of 3.73% and regional Australia offering 4.41%, income-focused investors have improving fundamentals to work with. As interest rates decline, the difference between rental yields and borrowing costs will likely improve further.

Is this now the right time to buy?

The upcoming federal election has put housing front and centre alongside cost of living pressures. Despite facing high interest rates for the past three years, property prices have managed to reach new record levels. Rent costs have also jumped considerably since COVID restrictions ended, with our growing population making Australia's housing shortage more severe than ever.

Financial experts predict the RBA will lower the cash rate to around 3.35% by the end of 2025. Combined with the major political parties both announcing ambitious housing policies to attract voters, economists are tipping significant price growth that could boost property returns considerably over the next one to two years.

RBA Cash Rate Target (And pre-COVID averages)

Source: Cotality (previously known as CoreLogic)

One of Australia's leading housing analysts has forecast prices will rise as much as 15% under the home ownership policies of both Labor and the Coalition.

"They're both inflationary. You need to model this stuff up but for a finger-into-the-wind guess, you would see prices rise 8-15 per cent, 12 months after the policies were enacted," SQM Research managing director Louis Christopher told The Australian Financial Review.

Former Reserve Bank of Australia governor Ian Macfarlane has echoed these concerns, stating bluntly that both parties' policies would push up demand for housing and cause prices to rise. "They are stoking up the demand side, which will mainly show up in higher prices," Macfarlane said.

Economists consistently point out that neither side's policies would meaningfully boost supply in the short term while both packages would significantly increase housing demand – a combination that historically leads to price appreciation and creates prime conditions for strategic property investment.

What's Next: 2025 Shapes Up as a Property Turning Point

The Australian housing landscape stands at what many experts call an inflection point, with key economic signals coming together to create positive momentum. There are now are positive signs of the market cycle reaching a turning point.

National Dwelling Value Index

Source: Cotality (previously known as CoreLogic)

Given housing supply is constrained, and development construction costs are high, it’s likely that supply will continue to remain low throughout 2025. On the demand side, with inflation finally back within the RBA's comfort zone, home values rising for three straight months, federal policies boosting the demand-side, and several interest rate cuts expected, 2025 is shaping up as the year we transition from a restrictive high-rate environment. Looking at these factors together, it’s likely we will see improved investor borrowing capacity and favourable conditions for buyers, which could drive property prices throughout 2025.