Last year, the RBA cash rate remained at 4.35%, its highest level in over a decade, shaping market dynamics across Australia. Affordable regions in WA, SA, and North QLD continued to outperform, yet other markets moved slowly due to their position in the cycle. While the RBA's February rate cut has provided some relief, housing affordability remains a challenge, and tight rental markets continue to impact everyday Australians.

As an investor with a $17 million property portfolio and founder of InvestorKit, a data-driven property investment advisory firm, I've spent years analysing economic and property market indicators across short, medium, and long-term horizons. Here, I break down seven key trends set to shape Australia's property market in 2025 to help you stay ahead.

Declining interest rates

Interest rates are set to decline further, boosting consumer sentiment. While confidence recovery in 2024 has been notable even with high interest rates, we expect this trend to accelerate in 2025 as rates fall, driving broader and more significant confidence recovery across all states and submarkets.

Demand to favour affordability

Looking ahead to 2025, even with potential rate cuts, affordable markets are expected to continue to be highly sought after. States like WA, SA, and QLD will likely retain their popularity, while VIC and NT may attract more interest due to their relative affordability and favourable early-cycle positions.

Slowing rental growth, supply to stay tight

Rental growth is likely to continue slowing as affordability pressures mount, but rental supply will remain tight. Rental growth and affordability are closely tied to wage growth. With rental growth continuing to far outpace wages, the slowdown is expected to persist into 2025 as rental affordability worsens. However, while rental growth is decelerating, vacancy rates are likely to remain exceptionally low. Sub-1% vacancy rates are increasingly becoming the new norm.

Slow markets to recover

Strong rental growth and improving yields will drive recovery in slower-moving markets. NSW and VIC, the two largest states, account for the highest number of yield-improving regions. As yields improve, investor activity is expected to increase, shifting housing demand from the rental market to sales.

Supply shortages to drive growth

Supply shortages will remain the primary driver of price growth. New housing supply has fallen to its lowest point in a decade, and while dwelling building approvals have gradually increased in 2024, the recovery has not been significant enough to return to the long-term average or meet underlying demand. On the contrary, underlying demand - driven by population growth and shrinking household sizes - has increased significantly.

Regional strength to hold

Regional property markets will remain strong as regional migration continues. The September 2024 Regional Movers Index report reveals that 35.6% more people moved from capital cities to regional areas than in the opposite direction in the last quarter, and the Regional Movers Index is now nearly 20% above its pre-COVID average.

Price gaps to increase

Price gaps between quartiles are expected to widen again as the upsizing trend gains momentum: Over the past two years, affordable areas (typically outer-ring suburbs) and smaller houses in cities like Brisbane, Perth, and Adelaide have experienced significantly stronger value growth than their more expensive counterparts. Many homeowners are now leveraging their capital gains to sell outer-ring or smaller homes and upgrade to areas closer to the city or larger homes that they couldn't afford previously.

As 2025 unfolds, navigating the property market will require a clear understanding of emerging trends. While challenges persist, opportunities remain for those who adapt. Staying informed and taking a strategic approach will be key to making the most of the year ahead.

Picture by Paddy Pohlod on Unsplash



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