Interest rates and inflation have been 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 closely set on these subjects in the year ahead.
REA Group executive manager of economics Angus Moore said the three interest rate cuts delivered over the course of 2025 were a key driver of market activity, helping reduce mortgage costs from the cyclical peak reached in 2024.
“That said interest rates are still obviously a lot higher than they were a few years ago, and that's still making housing affordability very challenging,” he said.
“But the fact that we've seen some cuts has been supporting home price growth notably in Sydney and Melbourne. Both cities have been - particularly in 2024 - pretty sluggish.
“But this year, both cities have been growing consistently, and the fact that we've seen interest rate cuts is a big part of that.”
All eyes on inflation
The latest release from the Australian Bureau of Statistics revealed the Consumer Price Index (CPI) grew 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) 2-3% target range.
Inflation came in hotter than expected in the September quarter and in the ABS' October reading. Picture: NewsWire/John Appleyard.
AMP head of investment strategy and chief economist Shane Oliver said the latest CPI data was concerning and opened up the possibility that further interest rates cuts were close to the bottom.
“We started off the year with a degree of optimism that interest rates might come down, and now the expectation has been dashed to some degree,” he said.
“That's sort of acting as a bit of a constraint on the residential property market, and possibly also the commercial property markets.”
PropTrack economist Angus Moore.
Mr Moore said with inflation sitting higher than what the RBA wanted, rate cuts were likely on hold for the foreseeable future.
“The RBA is now expecting underlying inflation will probably still be a little higher than their target band through early next year,” he said.
“As a result this delay the chance of another cut until early to mid-next year. But it's certainly not a guarantee.”
Government incentives help buyers
Mr Oliver said the Australian government’s expansion of its Home Guarantee Scheme - allowing 5% deposits - will to some degree, offset the negative impact of less rate cuts.
“It obviously brings forward demand from first-home buyers …It substantially reduces the amount of time that people need to save a deposit,” he added.
“So therefore, it can have the effect of bringing forward demand, particularly at a time when the residential rental property market is still quite tight.”
First-home buyers have been able to enter the market with a 5% deposit since October'. Picture: Getty
Mr Moore said while it is too early for data to gauge the incentives’ impact just yet, government data just released suggested there has been an increase in the take up of the scheme, in line with their expectations.
“It obviously takes time between applying for the program, finding a home, and that showing up in activity and home prices so it's probably a bit too early to have a really firm read on it.“
Loan approvals rise and the impact of investors
New owner occupier loan approvals in the September quarter totalled 83,846, a 2% (1,606 loans) rise compared to the previous quarter, and a 1.7% increase through the year.
The total value was $58.2 billion in the September quarter, a rise of 4.7% ($2.6 billion).
The data also revealed the average loan size grew $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 was $39.8 billion in the September quarter. Picture: Getty
Meanwhile, there were 57,624 new investment loans approved during the quarter, which was a 13.6% (6,906 loans) rise compared to the previous quarter, and growth of 12.3% yearly.
The value of new investment loans was $39.8 billion in the September quarter, a rise of 17.6% ($6.0 billion).
The data also found the average loan size rose by $11,686 to $685,634 over the quarter.
Mr Moore said investors have been an important part of housing market activity during the past couple of years, and this has continued in 2025.
“What that means is the share of loans going to investors at the moment, is close to, or at record highs in some of the states,” he said.
“In South Australia and the Northern Territory it’s at a record high, in Western Australia and Queensland, it's a little off, but not by much. New South Wales is at quite high levels, and the highest since 2017.
Notably in Victoria, which has not seen much investor activity, and has been lower than other states, has picked up relatively sharply in the September quarter, he said.
An uptick in consumer sentiment
As the year draws to a close, new research has found consumer sentiment is on the rise.
The Westpac-Melbourne Institute Consumer Sentiment Index surged 12.8% to 103.8% in November, which was the first positive read since early 2022.
A score of over 100 means optimistic consumers outnumber pessimistic consumers.
Consumer sentiment has risen in recent months. Picture: Getty
The report noted that sentiment overall was still only marginally positive rather than strongly optimistic.
“However, the move draws a clearer line under what had been an extended period of consumer pessimism when disposable incomes were being hit hard by a combination of high inflation, high interest rates and rising tax payments,” it read.
“Much of the November sentiment gain is coming from a markedly more confident assessment of prospects for the economy.”
Home price predictions for 2026
The three rate cuts of 2025 have already supported home prices Mr Moore says, and will continue to do so next year, albeit not as much had inflation been further under control.
While this year has been one of a “renewed upswing in the market,” Mr Oliver agrees 2026 will likely bring continued strength in property price growth of around 8%.
“Price growth will remain strong, but I don't see a further acceleration and there will be a boost from the shortage of housing and the influx to first time buyers, but that'll be partly offset by less rate cuts than previously were expected,” he said.
“And by the time we get to the second half of next year, there will be more debate about when the first rate hike might come.”
This article first appeared on Mortgage Choice and has been republished with permission.
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