The Reserve Bank shocked markets by holding rates at 3.85% despite 80% of economists predicting a cut.
In what AMP's Shane Oliver called a genuine surprise, the Reserve Bank held the official cash rate at 3.85% on Tuesday, wrong-footing the majority of economists who had predicted back-to-back cuts. The decision came despite monthly trimmed mean inflation sitting at 2.4% – well within the RBA's 2-3% target band.
Governor Michele Bullock explained the board had decided to "wait a few weeks" to confirm the economy was tracking as expected. "By our next meeting in five weeks, we will have the June quarter Consumer Price Index, another labour market reading, further information about international developments and an updated set of forecasts," she said, adding pointedly: "What the decision today was about was about timing rather than direction."
Key Highlights This Week
- RBA shocks with rate hold at 3.85% despite widespread predictions of cut
- August rate cut now "almost certain" according to experts
- Auction clearance rates stay above 70% for fourth straight week at 73.1%
- Property values up 2.3% ($18,000) since February's first cut
- Investor loans hit 38% of new lending – highest in three years
- Building only 180,000 homes annually vs 250,000 needed
RBA's Surprise Hold
Households with a mortgage have been left frustrated and economists baffled following the Reserve Bank's decision to hold the cash rate steady at its July meeting. Markets had priced in a 96% chance of a cut.
The Australia Institute senior economist Matt Grudnoff called the July meeting a "missed opportunity" to take pressure off families. "The Reserve Bank's decision to keep interest rates on hold at 3.85% means more unnecessary suffering for Australian borrowers," he added. "This decision comes with real costs."
Treasurer Jim Chalmers said the bank's decision had caught both the industry and the nation off guard. "I think it's certainly the case that the market was surprised. I think certainly economists were surprised by the outcome," he said. "I think it's fair to say as well millions of people who were expecting more rate relief yesterday and didn't get it."
While many Aussie homeowners are struggling to pay the bills, RBA governor Michele Bullock has kept the door open for further easing this year. "There are only five weeks until the next meeting, after which June quarter Consumer Price Index will be known," Ms Bullock said. "We must keep inflation down while trying to maintain a healthy job market."
Looking Ahead
The focus now shifts to RBA’s next meeting in August. Cotality's head of research Eliza Owen believes the hold makes an August cut "almost certain", noting the RBA appears to be taking a cautious "cut once per quarter" approach. "However, with falling inflation, weak retail sales data and continued sluggish performance in GDP per capita, data flows strongly support a rate cut in August," Owen explained.
Mortgage Choice chief executive Anthony Waldron agrees, saying if the June quarter CPI confirms inflation remains within target, a cut should be expected in August. "The July decision doesn't mean further cuts are off the table. There are four monetary policy board meetings still to go this year, so rates could drop further," he said.
Interestingly, not everyone sees the rate hold as bad news. Melbourne-based buyers advocate Cate Bakos said people currently looking to buy were actually in a better position now than if rates had been cut. "Most people who are in the market are relieved that they've got at least another six weeks to buy while they can and not experience an uber-competitive environment," Ms Bakos said. "I've had a lot of people desperately wanting to buy in winter to avoid the herds. This gives them a chance to be able to purchase in better conditions before the market really takes off."
As Shane Oliver observed: "It's not going to cause a dramatic change in sentiment on the part of buyers." He had earlier noted: "Unfortunately for the property market, I think it had got all teed up on another cut coming, and we had seen that acceleration in price growth."
Looking further ahead, market expectations remain bullish. Analysts expect another 75-125 basis points in cuts over the next year, with the cash rate potentially landing between 2.6% and 3.1% by mid-2026. This would represent a dramatic easing cycle that could add significant fuel to property markets.
"The RBA is explicitly telling the market it's about timing rather than direction and they are also likely conscious of the strong auction clearance rates and rising property prices. "With inflation at 2.1% and the economy sluggish at 1.5% growth, the direction is clear" says Godfrey Dinh, CEO of Futurerent.
Clearance Rates Defy Winter Blues
Despite the winter school holidays reducing auction volumes to 1,786 properties – the lowest since the King's Birthday weekend – buyer enthusiasm remains remarkably strong. The preliminary clearance rate of 73.1% marks the fourth consecutive week above 70% and the eighth time in ten weeks this psychological barrier has been breached.
Melbourne continues to lead with a 75.5% clearance rate, while Sydney posted a solid 72.5%.
The sustained strength is particularly notable given we're in the depths of winter, traditionally the quietest time for property markets. Louis Christopher from SQM Research doesn't mince words about what's happening: "The market is starting to move. For those who were considering on buying soon, they had better start to look more closely because the horse is about to bolt from the gate."
This urgency is being driven by simple mathematics. Since February's first cut, values have risen 2.3% – equivalent to $18,000 on the median dwelling. Buyers who hesitated are already paying more, and with August cuts looking increasingly certain, the fear of being priced out is palpable.
The breadth of market strength is equally impressive. Sydney prices increased 0.1% last week and 0.6% over the month, now sitting 1.3% higher year-on-year. Brisbane continues its stellar run with 0.2% weekly growth translating to 7.0% annual gains. Even Melbourne, despite being 0.4% lower than a year ago, is showing positive momentum with 0.1% weekly and 0.4% monthly growth.
Investors Storm Back to Record Levels
Perhaps the clearest sign of market confidence is the surge in investor activity. According to Mortgage Choice data, investment loans hit 30% of submissions in June – the highest proportion in three years. When combined with other lending data showing investors now account for 38% of new housing loans, we're seeing a dramatic shift from the 25-30% levels during the pandemic years. The value of new investor loans is up 5.4% year-on-year, confirming sustained momentum in this crucial market segment.
"The current market is continuing to fuel much-needed investor activity," notes Anthony Waldron. This isn't surprising when you consider the fundamentals. Tight rental markets, improving yields, and the prospect of capital growth are creating a compelling investment case.
What's particularly interesting is how borrowers are positioning themselves. Despite lenders slashing fixed rates – with some now below 5% – just 1% of June submissions had a fixed component. Borrowers are overwhelmingly choosing variable rates, betting that more cuts are coming and wanting the flexibility to benefit fully.
This investor resurgence has important implications for the broader market. While it adds competition for first-home buyers, it also supports new construction and rental supply. However, as we'll see, the supply side of the equation remains deeply problematic.
The lending environment remains prudent despite the surge. High loan-to-income and debt-to-income lending stays contained, suggesting this isn't a return to the loose lending of previous cycles. Banks are lending, but they're being careful about it.
Rental Market Reaches Inflection Point
After years of explosive growth that saw rental prices rise nearly 40% post-pandemic, Australia's rental market is showing signs of stabilisation. Domain's June quarter data reveals capital city rental prices have slowed or stalled, with combined house and unit median prices recording no change – the first time since 2019 that house rental prices nationally have remained stable for 12 months.
"It is relatively significant," says Barrenjoey's head of economic forecasts Johnathan McMenamin. "It has macroeconomic implications, particularly for RBA policy. The rental market is a really key indicator of underlying inflation in the broader economy."
Sydney recorded just a 0.6% quarterly change in house rental prices, while Melbourne, Brisbane, Adelaide, Canberra and Hobart recorded no change. The story is similar for units, with Sydney up 2.1% quarterly while Melbourne held steady.
Median rental asking price- Houses
McMenamin attributes the slowdown to affordability limits being reached: "Their wages aren't growing as fast as they were in the year prior, and that's basically putting a cap on how much people can spend on their rent." We're seeing households respond by increasing density – more people sharing houses, fewer keeping spare bedrooms.
Interestingly, landlords are also feeling relief from recent rate cuts and aren't feeling pressure to pass on costs. This creates a more stable environment for both tenants and investors, though McMenamin doesn't expect it to discourage investment given the tax benefits of negative gearing.
Despite the rental price stabilisation, vacancy rates remain critically tight. The nationwide residential vacancy rate sits at just 1.6%, well below the 3% level considered balanced, ensuring landlords maintain pricing power even as growth moderates. This persistent shortage of available rentals means any price relief for tenants is likely to be temporary rather than the start of a sustained correction.
Rental vacancy rates house and unit combined
Domain's Dr Nicola Powell adds another factor: first-home buyer incentives are helping some tenants transition to ownership, easing rental demand slightly. However, with migration continuing at elevated levels and new rental supply constrained, any relief is likely to be temporary.
House and Unit Rents Converge in Major Cities
In a remarkable shift reflecting the affordability crisis, the traditional price gap between renting houses and units has virtually disappeared in Australia's major cities. Domain's June quarter data reveals that combined capital city medians for both houses and units now sit at identical $650 per week – a convergence that highlights how tenants are being forced to compromise on space.
Melbourne leads this trend with just a $5 difference between median house rents ($580) and units ($575) – the narrowest margin nationwide and the smallest gap since 2012. Brisbane follows with a $30 differential between houses ($650) and units ($620), while even expensive Sydney has seen the gap narrow to just $40, with houses at $780 and units at $740 weekly.
"During the pandemic, there was a race for space, which saw house rents outperform unit rents," explains Domain's Dr Nicola Powell. "This is now reversing, and we are seeing a race to affordability, which has resulted in units outperforming house rents."
The data shows unit rents growing faster than houses across most capital cities during the June quarter. Sydney units climbed 2.8% annually to reach $740, matching the percentage growth of houses. Melbourne units surged 4.5% year-on-year compared to flat house rent growth, while Brisbane units hit a record $620 weekly despite house rents holding steady for the first time since December 2022.
Sydney's increase in rents over time
Median weekly asking rents for houses and units
This convergence is forcing difficult choices on tenants. "The affordability ceiling is being reached, and that means tenants have to opt for a share house or compromise on the type of dwelling or number of bedrooms," Powell notes. The strongest rental growth is now occurring in traditionally affordable outer regions – Sydney's Central Coast saw house rents jump 8.1% to $670 weekly, while Melbourne's outer-east recorded 6.6% growth to $650.
"Tenants are shifting property types and locations. They're looking for those pockets of affordability, and they're difficult to find in Sydney when that affordability ceiling has been reached," Powell observes. With vacancy rates remaining critically tight – Sydney at 1.1% and Melbourne at 1.3% – the rental market continues to heavily favour landlords despite the moderation in growth rates.
Melbourne's rental market presents an interesting case study. The median asking unit rent sits at $575 a week, up 4.5% from a year ago according to Domain's June quarter Rent Report. Meanwhile, asking rents for houses have held stable over the past year at a median $580 weekly – marking what Powell calls the "longest stretch of stability for house rents" at four consecutive quarters.
How Melbourne rents have risen over time
Median weekly asking rents for houses and units
Supply Crisis Deepens Despite Policy Efforts
The fundamental imbalance between supply and demand continues to worsen, creating a structural floor under property values. Australia needs around 250,000 new dwellings annually to meet population demand. Current completions? A mere 180,000 at best – leaving us 70,000 homes short every single year.
This shortfall isn't temporary. Labour shortages, elevated materials costs, and slow approval times combine to strangle new supply. Even worse, projections suggest Australia will fall 262,000 homes short of the government's 1.2 million target by mid-2029, with only 938,000 dwellings expected to be completed.
The migration numbers make this crisis even more acute. While government projections assume 300,000-350,000 annual arrivals, the reality is likely closer to 400,000-450,000 per annum over the next decade. In fact, over 500,000 people arrived in 2023 alone, demonstrating how badly official projections can underestimate actual migration flows. As one analyst notes: "We need these bums on our seats. Moreover we need the right bums."
Building approvals remain well below targets, especially for multi-unit dwellings. Developers are being forced to seek approvals for "the wrong stock" – properties that don't match market demand or affordability requirements. The result? Even when approvals are granted, many projects don't proceed because the economics don't stack up.
Government schemes like Help to Buy and the Housing Australia Future Fund provide modest support at the margins, but as our analysis notes: "These are helpful at the margins and only for a short while – they are not market changers. In fact, they stuff things up rather than do any lasting good."
"We're not building enough, and what we are building often isn't what the market needs," observes Godfrey Dinh, CEO of Futurerent. "This structural undersupply is the bedrock supporting property values, regardless of short-term rate decisions."
Strategic Positioning for the Year Ahead
Looking ahead, the property landscape presents clear opportunities for strategic investors. National house prices are forecast to rise between 3-6%, with attached dwellings (terraces and townhouses) expected to outperform at 5-7% as buyers sacrifice space for affordability and location.
The key theme emerging is the divergence between property types rather than just locations. Well-located attached dwellings near transport and employment hubs are attracting premium buyer interest, while outer suburban houses face more modest growth prospects. This shift reflects changing lifestyle priorities and the reality of affordability constraints.
With the cash rate potentially heading to 3.1% by December and 2.9% by early 2026, borrowing capacity will expand dramatically. An owner-occupier with a $600,000 loan could save $350 monthly if all forecast cuts materialise – substantial relief that will flow directly into increased borrowing power and market activity.
Supply constraints continue to underpin the investment case. With advertised stock sitting 16.7% below the five-year average and new approvals languishing well below requirements, the fundamental imbalance between supply and demand will worsen before it improves. This scarcity premium will be particularly pronounced in established areas with limited development potential.
The broader economic context remains supportive despite global uncertainties. Australian employment holds steady with unemployment tipped at 4.5%, household balance sheets are strong, and the banking system remains sound. These aren't the conditions that precede market crashes – they're the foundations for measured, sustainable growth.
For investors, the strategic message is clear: focus on property fundamentals rather than chasing yesterday's hot markets. Properties with genuine scarcity value, strong rental demand, and proximity to infrastructure will outperform regardless of which city they're in. The combination of rate cuts, chronic undersupply, and stable employment creates a compelling environment for those who choose quality assets over speculative plays.
Market Outlook
Despite the RBA's surprise hold, the trajectory for Australian property remains clear. We're in a market where fundamental forces – chronic undersupply, strong migration, and improving affordability via rate cuts – overwhelm short-term policy decisions.
The broader economic outlook supports this view. The RBA, Treasury, KPMG, NAB, and OECD all point to moderate growth between 1.8% and 2.3%, while unemployment is tipped to hover around 4.5% – still within what economists call the "full employment" range. This stable employment backdrop provides crucial support for property markets.
The numbers tell the story. With inflation at 2.1% and underlying inflation at 2.4%, both sit below the RBA's target midpoint. Retail sales remain weak, building approvals are slowing, and the economy limps along at just 1.5% growth. Against this backdrop, further rate cuts aren't just likely – they're necessary.
Markets are already pricing this in. The 2.3% value growth since February shows buyers aren't waiting for official confirmation. With clearance rates holding above 70% through winter and investors returning in force, the spring market could see significant acceleration.
The supply-demand imbalance remains the dominant theme. Building 70,000 fewer homes than needed annually while population grows by 400,000+ creates only one possible outcome – continued upward pressure on values. Government interventions provide marginal help but don't address the core issue.
For investors, the message is clear: the horse is preparing to bolt. Those positioned now will benefit from both the next wave of rate cuts and the structural undersupply that will define Australian property for years to come.
How Futurerent Can Help
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