The Australian residential property market is showing renewed confidence in 2025, supported by interest rate cuts and improving buyer sentiment, according to Alex Payne (pictured), director at Herron Todd White.
“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,” Payne said.
The Reserve Bank of Australia’s first 25-basis-point cut in February provided relief to borrowers, but the market remained subdued through the first quarter amid sticky inflation and political uncertainty.
Cotality’s Home Value Index shows national dwelling values rose 0.6% in July, the sixth consecutive monthly gain. Growth has stabilised just above 0.5% per month since May, with low supply, falling interest rates, and improving confidence supporting prices, while affordability pressures and uncertainty limit acceleration.
“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,” Payne said.
He added that a second rate cut in May, prompted by US tariff policies and inflation entering the RBA’s target band, has lifted market confidence.
“This development has shifted market sentiment considerably, with most economists now predicting further interest rate reductions sometime in the third quarter,” Payne said. “The result has been growing confidence across most markets over the past two months, with buyer activity showing signs of renewed vigour.”
All capital cities posted July gains. Darwin led with 2.2% growth, followed by Perth at 0.9%, while Hobart (+0.1%), Melbourne (+0.4%), and the ACT (+0.5%) saw softer rises. Darwin has surged 9.7% year to date, and mid-sized capitals like Perth are showing their fastest pace since late 2024, Cotality data showed.
“Smaller capital cities have emerged as the standout performers in this environment, with Perth, Darwin, and Adelaide leading the charge,” Payne said.
“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.”
Cotality data also highlights regional strength, with combined regional markets up 1.7% for the quarter versus 1.8% for capitals, showing a convergence in growth. Queensland, South Australia, and Victoria saw regional areas continue to edge out their respective capitals.
Payne noted that housing supply continues to lag population growth despite government initiatives.
“The supply side of the equation remains a persistent challenge despite government initiatives at both federal and state levels aimed at boosting available housing,” he said.
“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 remain tight, keeping pressure on affordability.
“Rental markets have remained exceptionally tight, with vacancy rates staying low across most capital cities and many major regional centres,” Payne said.
“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 demand is strongest below $800,000, with buyers increasingly looking interstate.
“Investor activity has shown particular strength in the sub-$800,000 market segment, with buyers increasingly looking beyond their local markets,” Payne said.
“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 is also performing strongly.
“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,” Payne said.
“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.”
Herron Todd White expects market confidence to remain intact through the second half of the year.
“Looking ahead to the second half of 2025, expectations remain positive across all market segments,” Payne said. “The improved outlook for interest rates, combined with the fundamental supply demand imbalance, suggests demand will remain robust.”
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
