Market update: Inflation drop opens door to rate cuts as housing values rise

As Australia approaches both a federal election and likely RBA rate cuts, the property market stands at a key turning point. Cotality's data reveals dwelling values grew 0.3% in April, adding approximately $2,720 to the median value of an Australian home, while underlying inflation has dropped to 2.9%. This combined improvement in both housing and economic conditions comes against a backdrop of temporary hesitation among buyers and sellers, with both auction clearance rates and transaction volumes showing signs of pre-election caution. With markets pricing in a 98% chance of a rate cut on May 20 and potential for multiple additional cuts in 2025, conditions are ripe for strategic property investment before interest rate cuts fully impact market dynamics.

"With inflation now within the RBA's target band for the first time since 2021, significant rate cuts appear to be a certainty. The combination of 0.3% dwelling value growth in April, rental yields at two-year highs, and developer data showing new home prices up 17% year-on-year signals we're moving into the next phase of the market cycle," says Godfrey Dinh, CEO of Futurerent. "This creates a unique window of opportunity for investors who act before the expected 4-5 rate cuts fully flow through to the market. We're already seeing early signs in the development sector with Mirvac sales up 76% and Stockland reporting their highest quarterly sales in three years. Market conditions are now perfectly positioned for strong growth through 2025."

Key Highlights

• RBA's preferred measure of underlying inflation has dipped below 3% for the first time in more than three years
• Bond traders fully expect a quarter-point rate cut to 3.85% at the RBA's May 20 meeting
• Australian dollar climbed 0.5% to US64.10¢, nearing a five-month peak of US64.49¢
• Cotality's national Home Value Index recorded a third straight month of growth in April, with dwelling values up 0.3%
• Every capital city recorded a lift in home values during April, ranging from 1.1% in Darwin to 0.2% in Sydney and Melbourne
• National gross rental yield reached a two-year high in April at 3.73%
• Stockland reports new home prices have risen 17% from a year ago
• Mirvac residential sales up almost 80% on the prior corresponding period

New Home Pricing Shows Remarkable Strength

Despite the measured pace of auction activity, the new home market demonstrates impressive resilience with significant price growth over the past year. Leading developers are reporting encouraging sales figures and substantial price appreciation:

ASX-listed Stockland painted a cautious but positive picture of recovery in its first-home buyer-dominated market, reporting:

• 6,232 signed contracts at the end of March – up from 5,565 a year earlier
• New home prices sold over settlement values increased by 17% in the first half
• Net sales of 1,509 homes over the quarter – up from 1,242 lots in the third quarter of FY24 and the highest quarterly total in almost three years

Fellow developer Mirvac showed similarly encouraging performance:

• Residential lot sales up 76% on the same quarter a year earlier
• Residential pre-sales rose to approximately $2.1 billion in the quarter

Mirvac's chief executive Campbell Hanan stated they are "ready to take advantage of any pick-up in market activity, with supportive government housing policy and a positive outlook for interest rates."

Inflation Result Creates Path to Multiple Rate Cuts

In a development that signals a fundamental shift in Australia's economic trajectory, the Reserve Bank of Australia's preferred measure of underlying inflation has dipped below 3% for the first time in more than three years. This crucial economic indicator cooled to 2.9% in the March quarter from 3.3%, bringing it within the RBA's 2% to 3% target range.

This inflation result has opened the door to what appears to be an inevitable interest rate cut following the federal election. Bond traders now fully expect the central bank to reduce the cash rate by a quarter-point to 3.85% when it meets on May 20.

"This is a significant further improvement from prior periods and should keep the RBA on track to continue cutting rates in May," said Charlie Jamieson, chief investment officer at Jamieson Coote Bonds. The bond fund manager expects at least three cuts by Christmas.

The shining light in the economic data was a decline in services inflation. "Seeing that will be a big relief for the RBA," added Fortlake Asset Management co-founder Christian Baylis.

Financial markets have adjusted their expectations in response to these developments:

• Money markets imply a 98% chance of a standard 0.25 percentage point cut to 3.85% at the RBA's next policy meeting
• Markets have trimmed bets of an outsized half-point reduction to less than one-in-ten chance
• The Australian dollar climbed 0.5% to US64.10¢, nearing a five-month peak

For property investors, this monetary policy shift presents a significant opportunity. Markets are currently pricing in approximately four to five additional rate cuts by the RBA this year, following its initial rate reduction in February. Such substantial easing would significantly improve buying power, improve investment mathematics, and stimulate market activity across all segments of the property sector.

Is There a Case for a Jumbo-Sized Rate Cut?

While most economists are projecting a standard quarter-point reduction, some market observers have raised the possibility of a more aggressive approach. Given that the cash rate is currently 4.10% and the RBA has lowered its estimate of what would constitute a neutral setting for monetary policy to under 3%, there may be room for more substantial action.

"Given the cash rate is now 4.10%, this suggests that the RBA board could deliver a 50 basis point cut in May and still leave policy mildly restrictive," notes economic analysis from the provided data.

This perspective is supported by three key factors that suggest demand is continuing to slow relative to the economy's capacity to grow:

1. Inflation control progress is evident but incomplete, with annual underlying inflation stalling at 2.7% for March
2. The tightness in the labour market is gradually loosening, with unemployment rising slightly to 4.1% in the March quarter
3. The gap between economic demand and supply is closing, reducing the need for such restrictive monetary policy

EY senior economist Paula Gadsby said with headline and underlying inflation finally sitting within target, the RBA had an opportunity to loosen monetary policy at its May meeting.

"Further cuts to bring the cash rate closer to a more neutral position are likely this year," she said.

Housing Values Continue Rising Despite Market Uncertainty

Australia's housing market demonstrated remarkable resilience in April, with Cotality's national Home Value Index recording a third consecutive month of growth. Dwelling values increased by 0.3% to reach a new record high, adding approximately $2,720 to the median Australian dwelling over the month.

Every capital city recorded growth in April, from Darwin's leading 1.1% gain to Sydney and Melbourne's modest 0.2% increases. While still positive, the national growth pace eased slightly from March's 0.4%.

Change in dwelling values, 30th April 2025

Tim Lawless, Cotality's research director, explained: "The February rate cut supported an upwards inflection in housing conditions, but the positive influence from lower rates seems to be losing potency. Household confidence slipped in April, with US tariff announcements and the upcoming federal election causing uncertainty."

This uncertainty has created a difference between prices and transaction volumes. While values continue rising, listings and sales have slowed significantly. As Lawless noted, "These uncertainties are more apparent in sales volumes compared to home values – a trend compounded by the 'super break' many Australians took between Easter and ANZAC public holidays."

Looking ahead: "With further rate cuts likely as soon as May 20th, and certainty returning after the federal election, we expect a further modest rise in values for 2025," predicted Lawless.

Despite the positive trend, several markets remain below their previous peaks:

• Sydney values are 1.1% below their September 2024 high
• Melbourne values remain 5.4% below their 2022 peak
• Hobart (11.1%), Darwin (2.7%) and ACT (6.4%) all sit below their all-time highs

Houses continue doing better than units despite stretched affordability, with values rising 1.1% across combined capitals over three months, more than double the unit sector's 0.5% lift.

Rental Market: Yields Reach Two-Year High as Growth Stabilises

Australia's rental market is showing signs of stabilisation while yields strengthen to multi-year highs, creating increasingly favourable conditions for income-focused investors.

The national rental index has risen by 0.6% consistently over the past three months, with a seasonally-adjusted 0.4% for April. This moderation is more evident in annual figures, with growth more than halving from 8.3% (April 2024) to 3.6% over the most recent 12 months.

Most capitals have recorded a substantial reduction in rental growth pace:

• Perth leads with 5.7% annual growth, down from 13.6% a year ago
• Melbourne's growth has eased from 9.4% to just 2.0%
• Sydney rents are rising at 1.9% annually, the slowest increase since April 2021

In contrast, Hobart has seen a remarkable turnaround, with rental growth rising to 5.4%, up from -0.3% a year ago. Darwin's rental market has also gained momentum, increasing from 3.2% to 5.0% annual growth.

Gross rental yields, dwellings

For investors, the most encouraging development is yield improvement. With rents outpacing housing values, the national gross rental yield reached a two-year high in April at 3.73%. Regional Australia continues offering higher yields at 4.41%, while combined capital city yields have improved to 3.52%, the highest in eleven months.

This yield enhancement comes at a strategically important time as the anticipated rate-cutting cycle would further improve the relative attractiveness of property investment returns compared to fixed-income alternatives.

Auction Results Reveal Cautious Market Sentiment

The auction landscape demonstrates a more measured pace of activity, reflecting a combination of seasonal factors, election uncertainty, and buyer caution. Last week's results provide important insights into current market dynamics:

• 1,080 auctions were held across combined capital cities, up from 644 during the Easter long weekend but substantially down from 1,964 at this time last year
• The preliminary auction clearance rate declined to 64.2% - the lowest preliminary clearance rate since mid-December 2024
• Melbourne was the busiest auction market with 472 auctions returning a preliminary clearance rate of 67.6%
• Sydney hosted 398 auctions with a preliminary clearance rate of 66.2%
• Brisbane recorded the lowest preliminary clearance rate (47.1%) since April 30th, 2023

Auction Clearance Rates

The trend in auction clearance rates has been gradually easing since the week ending February 23rd, when the preliminary clearance rate reached 72.1% following the 25-basis point rate cut on February 19th.

Market observers note that the volume contraction reflects the timing of consecutive long weekends (Easter and Anzac Day) rather than any fundamental shift in buyer sentiment or market dynamics.

Melbourne-based buyer's advocate Emma Bloom of Morrell & Koren noted: "Everyone is crossing their fingers that the market will change after the election. Whether it's a change of government or a rate cut, something has got to give. It's always cyclical, and it's a matter of who is going to make the first move – buyers stepping up or sellers reducing their price."

Investment Strategy: Positioning for the Rate-Cutting Cycle

The combination of cooling inflation, expected rate cuts, rising dwelling values, and strengthening rental yields creates distinct strategic opportunities for property investors in 2025:

1. Pre-Rate Cut Timing Window

With bond traders fully expecting a rate cut on May 20 and markets pricing in four to five additional reductions this year, investors who secure properties before these monetary shifts take full effect may capture both improved affordability and subsequent value appreciation.

2. Supply-Demand Fundamentals

The continued strength in new home pricing (up 17% year-on-year according to Stockland) suggests persistent demand despite elevated interest rates. As interest rates fall, this underlying demand could translate into broader market growth, particularly in supply-constrained areas.

3. House vs. Unit Strategy Refinement

With houses doing better than units (1.1% vs 0.5% quarterly growth across capital cities), investors may need to refine their buying strategies. While houses offer stronger capital growth prospects, units may present better value and yield opportunities in select markets.

4. Post-Election Positioning

As Emma Bloom noted, "Everyone is crossing their fingers that the market will change after the election." This sentiment reflects the pattern of held demand being released following electoral cycles, creating potential for increased transaction volumes once political uncertainty resolves.

5. Yield-Focused Acquisition

With national gross rental yields reaching a two-year high of 3.73% and regional Australia offering 4.41%, income-focused investors have improving fundamentals to work with. As interest rates decline, the spread between rental yields and borrowing costs will likely improve further.

2025: A Year of Transition for Australian Property

Australia's housing market stands at a key turning point as multiple economic indicators align to create a favourable investment environment. The return of inflation to the RBA's target band, combined with three consecutive months of dwelling value growth and the high probability of multiple rate cuts, positions 2025 as a year of transition from high-rate constraints to more accommodative conditions.

Godfrey Dinh comments: "The stars are aligning for property investors in 2025. With inflation now under control and markets pricing in four to five rate cuts this year, we're witnessing ideal conditions for strategic portfolio expansion. As these rate cuts flow through the economy and post-election certainty returns, we expect to see accelerating growth across well-positioned assets in supply-constrained markets."

For strategic investors, these converging factors create a window of opportunity. Those who secure well-positioned assets before the full impact of interest rate cuts takes effect will likely capture both the affordability advantage of current conditions and the growth potential of the emerging cycle.

How Futurerent Can Support Your Investment Strategy

The convergence of these favourable market conditions presents an ideal moment to adopt a proactive approach to your investment portfolio.

Futurerent is uniquely positioned to support your investment strategy during this pivotal market period. Our tailored funding solutions can help you:

• Move quickly to capitalise on pre-rate cut conditions before RBA monetary easing intensifies competition
• Access capital to acquire strategic properties before post-election sentiment shifts drive increased market activity
• Undertake targeted improvements to existing properties to maximise both rental returns and capital appreciation potential
• Maintain financial flexibility while navigating this evolving market environment

In a market where timing and positioning are increasingly critical, our streamlined approach ensures you can access the capital you need efficiently and without unnecessary complexity.

We invite you to contact our team to discuss your objectives and explore how our solutions can help you capitalise on the opportunities emerging across Australia's property market.