Australia’s housing market in 2025 was pulled in different directions by lower interest rates, stubborn inflation, targeted government incentives and strong investor demand, with rising consumer confidence and a tight rental market setting the tone for another year of solid price growth in 2026, according to Mortgage Choice.
After a bruising rate cycle in 2024, three interest rate cuts in 2025 helped revive buyer demand by easing mortgage costs from their peak. This monetary relief has been a key driver of renewed price growth in the major capitals.
REA Group executive manager of economics Angus Moore (pictured left) said the cuts have been crucial in turning around conditions in Sydney and Melbourne.
“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,” Moore said. “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.”
However, borrowing costs remain far from cheap, which is still weighing on buyers’ budgets.
“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,” Moore said.
The impact of those cuts has been tempered by persistent inflation, which is limiting how much further the Reserve Bank (RBA) can loosen policy. The Consumer Price Index rose 3.8% in the 12 months to October 2025, up from 3.6% in September and still above the RBA’s 2–3% target band.
AMP head of investment strategy and chief economist Shane Oliver (pictured right) said the latest CPI data has dented earlier optimism about deeper rate relief.
“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,” Oliver said. “That's sort of acting as a bit of a constraint on the residential property market, and possibly also the commercial property markets.”
Moore said the inflation outlook is likely to delay any further cuts.
“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.”
With interest rate relief looking more limited, government policy has taken on a bigger role in supporting demand, particularly among first-home buyers. The expanded Home Guarantee Scheme, which allows eligible buyers to purchase with a 5% deposit, is designed to offset some of the drag from higher-for-longer rates.
“It obviously brings forward demand from first-home buyers …It substantially reduces the amount of time that people need to save a deposit,” Oliver said. “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.”
Moore said early data suggests more Australians are taking advantage of the scheme, although the full effect is yet to show up in prices and activity.
“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,“ he said.
The lending data for 2025 shows how these forces are playing out on the ground, with modest growth in owner-occupier borrowing and a much stronger upswing among investors.
New owner-occupier loan approvals reached 83,846 in the September quarter, up 2% on the previous quarter and 1.7% over the year. The total value rose 4.7% to $58.2 billion, while the average loan size climbed $15,873 to $693,801. Growth was led by New South Wales (4.9%), Victoria (2.4%) and the ACT (6.7%).
Investor activity has been even more notable. There were 57,624 new investment loans approved in the quarter, a 13.6% rise from the previous quarter and 12.3% higher year-on-year. The value of new investment loans jumped 17.6% to $39.8 billion, and the average loan size increased by $11,686 to $685,634.
Moore said investors have remained a powerful force in the housing market throughout the past couple of years, and that 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.”
Victoria, which had seen relatively weak investor interest compared to other states, recorded a sharp pickup in the September quarter.
According to Mortgage Choice, the strengthening in lending and prices is being underpinned by a shift in consumer mood after a long period of pessimism.
The Westpac–Melbourne Institute Consumer Sentiment Index surged 12.8% in November to 103.8, marking the first positive reading since early 2022. A score above 100 means optimistic consumers now outnumber pessimistic ones.
The report noted that, even in November, sentiment was only marginally positive overall, signalling an important break from the recent downturn, when households were squeezed by “a combination of high inflation, high interest rates, and rising tax payments.”
However, the index dropped 9% to 94.5 in December, pulling confidence back into “cautiously pessimistic” territory as households absorbed stronger‑than‑expected inflation data and renewed concerns that interest rates may need to stay higher for longer.
Taken together, lower but still elevated rates, persistent inflation, government incentives and strong investor demand have made 2025 a year of renewed upswing rather than runaway boom. Those same forces are shaping expectations for 2026.
Moore said the three rate cuts delivered in 2025 have already underpinned home prices and will continue to provide support into next year, even if their impact is being capped by higher inflation.
Oliver expects the “renewed upswing in the market” seen this year to roll into 2026, with national property prices likely to rise by 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.”
Westpac has lifted its 2025 national dwelling price forecast to 8%, led by double‑digit gains in Brisbane and Perth, but expects growth to slow to around 6% in 2026 and 5% in 2027 as delayed rate cuts, stretched affordability and slower population growth take effect.
Read the Mortgage Choice article in full. You can also access it on the realestate.com.au website.
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