Tumbling inflation, housing-friendly state budgets set to shake up property market
The case for another rate cut just grew irresistible and, together with a series of state budgets with the housing crisis in their sights, looks set to influence property markets for the year ahead.
Plunging inflation and a series of housing-friendly state budgets have added more fuel to property market prices that had already rekindled in in the past few months.
Inflation figures released Wednesday (25 June) by the Australian Bureau of Statistics show that the annual trimmed mean, a measure of underlying inflation, was down to 2.4 per cent in May, from 2.8 per cent in April, the lowest rate since November 2021.
The headline 2.1 per cent annual CPI inflation in May was down from 2.4 per cent in April, well below market expectations.
The already simmering property market could come to a boil in the back end of 2025, with analysts now pricing in an 81 per cent chance of an interest rate cut on 8 July.
Dr Nicola Powell, Domain’s Chief of Research and Economics, said that with underlying inflation sitting firmly within the RBA’s 2 to 3 per cent target band, the case for a July rate cut just got a whole lot stronger.
“A lower cash rate will also lift borrowing power and could finally give first-home buyers a shot at entering the property market this year.
“Yes, while lower rates usually push property prices up, we shouldn’t expect a runaway market; slower population growth, improved housing supply, and persistent affordability challenges are likely to keep a lid on sharp price gains.
“Still, momentum is changing, there’s less volatility, more confidence; the housing market’s next chapter is starting to take shape.”
The inflation figure will come as a relief to the increased number of home owners who were more than 30 days late on repaying their loans. Fitch Ratings on Wednesday reported that this cohort of troubled borrowers had risen 23 basis points in the first three months of the year to 1.35 per cent. Mortgage arrears remain below the high of 1.86 per cent recorded in Q2 2020.
Annual housing inflation was 2.0 per cent in May, down from 2.2 per cent in April.
Rents rose 4.5 per cent in the 12 months to May, following a 5.0 per cent rise in the 12 months to April.
Michelle Marquardt, ABS Head of Prices Statistics, said this is the lowest annual growth in rental prices since December 2022, consistent with smaller increases in advertised rents and stable vacancy rates across most capital cities.
New dwelling prices rose 0.8 per cent in the 12 months to May, down from a 1.2 per cent rise in the 12 months to April.
“This is the smallest annual growth since April 2021 as project home builders offered discounts and promotional offers to entice business,” Ms Marquardt said.
Likely property price reaction not uniform
While the lower interest rate environment was expected to put upwards price pressure on a national market that rose 0.5 per cent in May, prospective buyers in the country’s largest and by far most expensive property market were urged to exercise caution before seeking investment opportunities.
Allen Habbouchi, Principal Licensee – Sydney, aussieproperty.com, said that while recent interest rate cuts may appear to create a more favourable lending environment, the reality is that lower rates alone do not automatically translate into strong investment opportunities.
“In the current market, property prices—particularly in key metropolitan areas—remain elevated, and Sydney rental yields are not keeping pace with capital values.
“This imbalance significantly impacts the financial viability of new investment purchases.
“In simple terms, even though borrowing may be cheaper, the return on that investment through rental income often fails to meet the cost of ownership when factoring in outgoings, property management fees, maintenance, and other holding costs.
“Gross rental yields in many suburbs are at historic lows, and with softening tenant demand in some segments and increasing supply in others, there’s growing downward pressure on rents,” Mr Habbouchi said.
Sydney has the nation’s lowest rental yields of any major market. In this environment, investors need to be highly strategic, he added.
“Blindly entering the Sydney market on the basis of cheaper finance alone can lead to negative cash flow positions that aren’t sustainable long term.
“A more prudent approach in 2025 is to assess the fundamentals: local demand, yield stability, vacancy rates, and future growth potential—not just interest rate movement.”
States turn attention to housing
First home buyers in Queensland and property developers in New South Wales were among the biggest winners in those states’ government budgets, released Tuesday.
The Queensland 2025-26 budget included provisions for investments into home ownership, housing infrastructure and new social and community housing.
The $165 million Boost to Buy scheme delivers an equity contribution of up to 30 per cent for new homes and 25 per cent for existing homes with a sale price of up to $1 million, for households earning $225,000 or less. The scheme complements the existing Home Buyer Grants, which also received a $30,000 boost until June 2026.
Housing was also the primary focus of the NSW budget.
Treasurer Daniel Mookhey committed $1 billion to developers to build new homes.
Over a five-year period, the state government will act as guarantor on up to 50 per cent of approved housing projects across the state. The Australia-first initiative will provide between $5 million and $50 million in pre-sale guarantees for each project.
“The scheme – which will proceed on a rolling basis – will bring forward the construction of up to 15,000 extra market homes over the next five years,” Mr Mookhey said.
“These are the projects that will add more low-to-medium density housing in neighbourhoods people love to live in,” he added.
For projects eligible for the guarantee, the government will ensure the sale of a set number of homes.
“This will spare industry from some of the time and cost of having to convince their lenders there are enough buyers for the homes they want to build.
“It will let them get on with building more homes for people to buy and it will make sure more of the homes that are getting approved are then getting built.”
In theory, the scheme should cost the government nothing. If developers can’t find customers, the state buys the homes and therefore retains the value of the assets.
The Western Australian Government’s state budget was released last week, and included incentives aimed at producing more modular homes that could quickly address the housing supply shortage.
