Momentum returns to residential markets as buyers respond to rate relief
Momentum returns to residential markets as buyers respond to rate relief
The Australian residential property market continues to be shaped by the fundamental forces of supply and demand, with 2025 proving to be a year of cautious optimism following a period of uncertainty and measured recovery.
The Reserve Bank of Australia’s decision to cut interest rates by 25 basis points in February marked the first reduction since 2020, providing initial relief to a market that had been grappling with persistently high borrowing costs. However, the RBA’s cautious stance throughout the early part of the year combined with inflation levels remaining above their target range and uncertainty surrounding the federal election in May. As such, we saw softer market activity across most regions.
The introduction of US tariff policies provided an unexpected catalyst, leading to a second rate cut in May as inflation data finally moved within the RBA’s target band. This development has shifted market sentiment considerably, with most economists now predicting further interest rate reductions sometime in the third quarter. The result has been growing confidence across most markets over the past two months, with buyer activity showing signs of renewed vigour.
Smaller capital cities have emerged as the standout performers in this environment, with Perth, Darwin and Adelaide leading the charge. These markets have benefited from improved affordability relative to Sydney and Melbourne, combined with strong local economic fundamentals and interstate migration patterns. The performance disparity between these centres and the larger capitals highlights the increasingly diverse nature of Australia’s property landscape.
The supply side of the equation remains a persistent challenge despite government initiatives at both federal and state levels aimed at boosting available housing. While building approvals have shown positive signs of increase in certain areas, the pipeline for completed dwellings continues to lag significantly behind population growth. The construction sector faces ongoing headwinds including labour shortages, elevated material costs and lengthy approval processes, all of which compound the supply shortage.
Rental markets have remained exceptionally tight, with vacancy rates staying low across most capital cities and many major regional centres. This has created sustained upward pressure on rents, making rental affordability a consistently pressing concern for many Australians. This strong rental demand underscores the fundamental imbalance between housing supply and population growth.
Investor activity has shown particular strength in the sub-$800,000 market segment, with buyers increasingly looking beyond their local markets. Interstate investment has become a notable feature, with investors from higher-priced markets seeking opportunities in more affordable regions. This trend reflects both the search for better yields and the recognition that value exists across diverse geographical markets.
The prestige market segment has continued to be a standout performer, driven by undersupply and significant demand for high-quality residential property in prestigious locations. Buyers are demonstrating willingness to pay premiums for completed, modern properties, reflecting the time and cost associated with new construction in the current environment. Record-high construction costs for new builds have made existing quality stock increasingly attractive to discerning purchasers.
Looking ahead to the second half of 2025, expectations remain positive across all market segments. The improved outlook for interest rates, combined with the fundamental supply-demand imbalance, suggests demand will remain robust.
Source: Heron Todd White, Rachel Swindles
