Inflation has fallen to 2.1% – its equal-lowest level in almost four years – sending markets into overdrive with an 89% probability of a July rate cut. Melbourne's auction clearance rate hit 76.6%, the highest in over two years, while Sydney house prices are forecast to crack $1.8 million and potentially out-earn their owners. With less than 1% of households in negative equity and mortgage arrears contained below 2%, the foundations for the next property surge are rock solid.
The stars are aligning for Australian property investors in ways we haven't seen since the last major growth cycle. This week’s inflation figures delivered exactly what the market was hoping for – headline inflation tumbling to 2.1% from 2.4%, below even the most optimistic forecasts. This isn't just another data point; it's the green light the Reserve Bank needs to accelerate rate cuts.
What's really exciting is how quickly buyers are responding. Last weekend's national auction clearance rate of 73.9% was the highest since July last year, with Melbourne posting 76.6% – the best result in over two years. When you combine falling inflation, imminent rate cuts, and surging buyer confidence with the fact that Australian households are in their strongest financial position in years, you have all the ingredients for something special.
Key Highlights
- Inflation falls to 2.1% in May, equal-lowest since July 2021, with trimmed mean at 2.4%
- Markets price 89% probability of July rate cut, with cash rate expected at 3.0% by year-end
- National clearance rate reaches 73.9% – highest since July 2024
- Melbourne auction clearance rate hits 76.6% – highest in over two years
- Sydney median house price forecast to reach $1.8 million, gaining $112,469 in 12 months
- Mortgage arrears remain below 2% despite cost of living pressures
- Less than 1% of households in negative equity, down from 1.5% pre-COVID
- 50% of homeowners have paid off mortgages completely
Inflation Falls Sharply
The inflation numbers released this week sent shockwaves through financial markets – in the best possible way. Headline inflation crashed to just 2.1% in May, down from 2.4% in April, marking the equal-lowest rate we've seen since July 2021. Even more importantly for the Reserve Bank, trimmed mean inflation – their preferred measure – fell to 2.4% from 2.8%, a three-and-a-half-year low.
The market was expecting inflation to ease to 2.3%, so this 2.1% print represents a genuine positive surprise. We're now firmly within the RBA's 2-3% target band after years of battling price pressures that peaked at a painful 8.4% in December 2022.
Treasurer Jim Chalmers couldn't hide his satisfaction: "This progress means Australia is better placed and better prepared than other countries for heightened economic uncertainty and volatility around the world." It's hard to argue with that assessment when you look at the dramatic turnaround we've achieved.
The rental market, which has been a major inflation driver, is finally cooling with rent inflation slowing to 4.5% – the lowest pace since December 2022, though still well above pre-pandemic levels. Perhaps even more encouraging, inflation in building new homes has fallen to just 0.8% annually. To put that in perspective, we were looking at a painful 22% peak in mid-2022 when supply chains were in chaos and everyone was renovating at once. That's a stunning turnaround that will take the pressure off new construction costs.
Annual inflation in the housing sector (%)
Year-ended change in prices
Betashares chief economist David Bassanese captured the mood perfectly: "All up, however, the underlying trend for inflation still appears downward which is good news for the many millions of Australians still counting on further mortgage rate relief in coming months."
Banks Predict July Cut
The inflation surprise has triggered a stampede among economists to bring forward their rate cut predictions. Deutsche Bank, MST Marquee, and RBC have now joined Commonwealth Bank in forecasting the Reserve Bank will cut by 0.25% next month. This represents a major shift in consensus – just weeks ago, most were predicting August or later.
Financial markets have responded decisively. As of June 24, the ASX 30 Day Interbank Cash Rate Futures showed an 89% expectation of a rate cut to 3.60% at the next RBA meeting. By Christmas, markets are almost fully priced for three more reductions, expecting the cash rate to fall to 3.0%.
ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve
As at market close on 24 June 2025
What's driving this sudden confidence? It's not just the inflation numbers. The economy grew by only 0.2% in the March quarter, well below expectations. Combined with the inflation data, it paints a picture of an economy that needs stimulus, not restraint. KPMG's analysis adds another layer – they believe escalating Middle East conflicts and higher energy costs could shave 0.2% off Australia's economy, which would likely push the RBA into being "more aggressive" on rate cuts.
NAB's chief economist Sally Auld provided crucial context about global factors: "The RBA is likely to be more worried about the growth consequences of higher oil prices than the inflationary consequences, particularly because the key dynamic forcing growth downgrades locally has been a soft consumer. So the RBA is likely to be more sensitive to headwinds to consumption in the near term."
ANZ's head of Australian economics, Adam Boyton, echoed this view: "Given higher oil prices can also depress growth and consumer spending, the RBA won't just be thinking about the inflationary impact of higher energy prices, but also the negative impact on activity."
"When inflation falls this fast and markets price cuts with this level of certainty, it creates a powerful momentum shift in property markets," says Godfrey Dinh, CEO of Futurerent. "Buyers who wait for the cuts to actually happen often find themselves competing in a much hotter market."
Auction Results Strengthen
If you want proof that the property market is already responding to improving conditions, look no further than last weekend's auction results. The combined capitals preliminary clearance rate of 73.9% was the highest since July last year – a remarkable turnaround from the 63.8% recorded over the King's Birthday long weekend just two weeks earlier.
Melbourne led the charge with an extraordinary 76.6% clearance rate from 947 scheduled auctions – the highest result in more than two years. What's particularly telling is where the action was hottest. With Melbourne's median auction house price at $850,125 – well below the national median of $1,080,000 – it's the sub-$2 million properties that are absolutely flying.
"Sub-$2 million, they're rocking along," observed Emma Bloom, a buyers' agent at Melbourne-based Morrell & Koren. This is where first-time buyers and young couples are making their move, taking advantage of improved borrowing capacity to secure their foothold in the market.
Capital City Auction Data (Preliminary) - headline results
What makes these results even more impressive is that winter typically suffers a fall in auction volumes. While next week should see around 2,080 auctions nationally, this will drop below 1,800 the following week as "cooler weather dampens activity" according to Cotality. Yet despite these seasonal headwinds, clearance rates are surging – a sure sign of genuine market strength.
Sydney wasn't far behind, with the preliminary clearance rate jumping to 73.5% – the highest since February. The harbour city scheduled 789 auctions, with a median house sale price of $1,900,000 and units at $970,000. These aren't small numbers, yet buyers are stepping up with confidence.
Brisbane's preliminary rate climbed to 66.7% from 61.4% the previous week, while Adelaide posted an impressive 77.5% from 83 scheduled auctions. Only Canberra disappointed, dropping to 55.3% from 60.7%.
Belle Property's Gallina summed up the shift in buyer behaviour: "Buyers are more confident now, and we have noticed buyers who were previously just monitoring the market now actively making offers or bids at auction. Our local area currently has lower stock than usual, and with buyers coming in, values are starting to increase."
Household Finances Improve
Here's what makes this market recovery different from speculative booms of the past: Australian households have never been in a stronger financial position. The latest RBA data shows less than 1% of households are in negative equity – a massive improvement from the 1.5% recorded in early 2019 before COVID.
Even more remarkably, 50% of homeowners have paid off their mortgages completely. That's half the market sitting on valuable property with zero debt, perfectly positioned to upgrade, invest, or help their children enter the market. The majority of those still with mortgages have loan-to-value ratios well below 80%, with many clustered in the comfortable 40-60% range.
This financial strength is reflected in mortgage arrears data. Despite high interest rates and cost of living pressures, the proportion of borrowers falling behind remains below 2% of the loan book. APRA data shows arrears ticked up only marginally from 1.64% in Q4 2024 to 1.68% in Q1 2025. Despite this subtle lift, mortgage arrears remain well below the recent high of 1.86% recorded in Q2 2020 during the peak of COVID uncertainty.
Mortgage arrears
Several factors explain this resilience. Lending standards have been incredibly strong throughout the recent cycle, with consistently low portions of "risky" mortgages. Interest-only lending comprises just 19.7% of originations, well below the previous 30% limit set by APRA. High loan-to-income and high debt-to-income lending remains contained at just 3.1% and 5.8% respectively.
Loan metrics
The employment market provides another crucial support. Unemployment sits at just 4.1% as of May, holding around this level or lower since early 2022. Even better, underemployment – which measures workers who want more hours – remains close to multi-decade lows. This means most Australians have retained the ability to service their mortgages through steady, sufficient employment.
Unemployment and underemployment, Australia
Even if Australia has an economic downturn and unemployment rises, most borrowers have the flexibility to manage their situation — including the ability to sell without taking a loss, the data shows. This creates a crucial floor under the market, preventing the forced sales that could derail recovery.
Sydney Approaches $1.8 Million
The latest Domain Forecast Report for Financial Year 2026 paints a picture of dramatic price growth ahead, with Sydney and Melbourne set to lead the charge. Sydney's median house price is forecast to surge 7% from $1,717,107 to $1,829,576 – a gain of $112,469 in just 12 months.
Here's the jaw-dropping part: this capital growth actually exceeds Sydney's average full-time salary of $103,251, meaning houses could literally out-earn their owners. It's a sobering reminder of how property has become Australia's most powerful wealth creation vehicle.
Thomas McGlynn, chief executive and head auctioneer of BresicWhitney, believes $1.8 million is definitely achievable: "The only way to know that the market is on the way back up is when it's already rising, and we haven't seen a rapid price rise yet. However, that wheel may already be in motion, so I think now is a great time to buy to take advantage of the next upwards cycle in Sydney property."
McGlynn points to renewed buyer confidence from rate cuts as the key driver: "What we see is that people start to revisit their bank, they revisit their mortgage broker, and they start to realise, 'I might be able to spend slightly more'... This leads to increased competition and increased competition leads to higher prices."
Ray White chief economist Nerida Conisbee explains why Sydney leads on rate cuts: "Sydney is the most sensitive to interest rates of all capital cities, and primarily because it is the most expensive market." With Sydney's median house price almost $1 million higher than its median unit price of $835,819, the leverage effect of rate cuts is magnified.
Melbourne Recovery Gains Momentum
After years of underperformance, Melbourne is finally having its moment. The Domain forecast predicts 6% capital growth, taking the median house price from $1,046,246 to $1,112,623 – a $66,377 lift that would see the city fully recover from its two-year downturn.
"Melbourne underperformed for so many years; it's been the weakest capital city market," explains Domain chief of research and economics Dr Nicola Powell. "Melbourne house prices will enter into an established recovery and will be fully recovered by the end of the financial year."
The shift represents what Powell calls "the baton passing from affordability-driven markets to interest rate-sensitive ones." After years of Perth and Adelaide leading on affordability grounds, the dynamic is reverting to normal with Sydney and Melbourne taking charge.
Melbourne buyer agent Cate Bakos has seen the change firsthand: "Melbourne is certainly showing signs of being in recovery; it hasn't been this busy since 2021. The biggest shift this year has definitely been investors – they're coming back to Melbourne."
Interestingly, many of these investors are coming from Perth: "I've had a disproportionate number from Perth – and there are no surprises there. Perth has had such strong gains, and a lot of Perth owners have decided to use their equity and buy something in Melbourne."
Bakos is bullish about the year ahead: "I think 2026 will be stronger than 2025, particularly with falling interest rates. We've also got very healthy employment levels, and we've just seen an uptick in household savings, probably in direct response to the rate cut." The household savings data backs this up – after being squeezed by rate rises and inflation, Australians are finally able to put money aside again, creating a buffer that will support future property purchases.
Household saving ratio
"Melbourne's resurgence isn't just about catch-up growth – it's about fundamentals finally aligning with opportunity," notes Godfrey Dinh, CEO of Futurerent. "When you see interstate investors using their equity to buy in, it signals genuine value that the broader market will soon recognise."
History Suggests Growth Ahead
When interest rates fall, house typically prices rise – it's one of property's most reliable patterns. As economics correspondent Michael Read notes: "History just shows that when interest rates go down, house prices go up and there's no compelling case as to why this time should be any different."
Some economists expect modest increases this time around, but Bank of Queensland chief economist Peter Munckton sees potential for gains up to 15%. The key difference this time is the starting position – with such strong household balance sheets and contained mortgage stress, there's more room for prices to run without creating systemic risks.
Domain research is forecasting every capital city except Canberra is predicted to hit record high house prices during the 2026 financial year. Brisbane's median is expected to sit just shy of $1.1 million, while Perth is forecast to crack the million-dollar mark for the first time. Adelaide continues its steady climb, though at a more moderate pace as affordability constraints begin to bite.
The report highlights how "not all markets are equal — the gap between top-performing and underperforming suburbs is widening, making strategic property selection more critical than ever." This fragmentation creates both risks and opportunities for investors willing to do their homework.
Investment Strategy Considerations
The convergence of falling inflation, imminent rate cuts, and strong household finances creates a compelling investment environment. But success requires understanding the nuances of this market cycle.
First, timing remains critical. History shows property prices begin rising in anticipation of rate cuts, not after they occur. With markets pricing an 89% chance of a July cut and expecting rates at 3.0% by year-end, the window is narrowing before price appreciation accelerates.
Second, market selection matters more than ever. Sydney and Melbourne's sensitivity to rate cuts makes them obvious beneficiaries, but they're also the most expensive entry points. The sweet spot might be in Melbourne's sub-$1.5 million housing market where first-time buyers and investors are already competing strongly.
Third, financial resilience provides a safety net. With less than 1% negative equity and mortgage arrears below 2%, this isn't a fragile recovery built on speculation. It's a fundamentally sound market with room to grow.
Fourth, consider the yield story. While the headlines focus on capital growth, falling interest rates create a powerful double benefit for investors. As mortgage rates drop, the gap between rental income and loan repayments widens significantly. With mortgage rates heading lower, many investors will see their properties shift from negative to positive cash flow.
Market Outlook
Australia's property market stands at the beginning of what could be a significant growth phase. The combination of inflation returning to target, multiple rate cuts ahead, and the strongest household balance sheets in years creates ideal conditions for price appreciation.
The immediate catalyst is clear – the July 7-8 RBA meeting where an 89% probability of a cut has markets on edge. But looking beyond July, the trajectory toward a 3.0% cash rate by Christmas represents a fundamental reset in borrowing costs that will ripple through 2026 and beyond.
Sydney's march toward $1.8 million median house prices might grab headlines, but Melbourne's recovery from years of underperformance could offer strong value. With many interstate investors already moving and local buyers gaining confidence, the momentum is building week by week.
The broader economic context remains supportive despite global uncertainties. Australian employment holds near multi-decade lows, household savings have increased, and the banking system remains sound. These aren't the conditions that precede market crashes – they're the foundations for sustainable growth.
"What we're seeing isn't irrational exuberance – it's rational confidence backed by solid fundamentals," observes Godfrey Dinh, CEO of Futurerent. “Less than 1% negative equity, 50% of owners mortgage-free, and unemployment at 4.1% – these aren't the conditions that create crashes. They're the foundations that support sustained growth when combined with falling rates."
For investors, the message is clear: the stars are aligning, but windows of opportunity don't stay open forever. Those who recognise the shift early position themselves for gains that could potentially see properties out-earn salaries. In a market where timing is everything, the clock is already ticking.
How Futurerent Can Help You
Property investors know that prices grow faster than you can save. And even with a foot on the property ladder, taking the next step shouldn't mean asking the bank's permission or signing up to another lifetime of interest when all you need is to unlock what's already yours.
What if you could access that equity without refinancing, selling the property, or waiting until it's too late?
That's why investors turn to Futurerent - to unlock their equity without the usual trade-offs. There's no refinancing, no painful paperwork, and no impact on your credit score.
Futurerent helps investors cash out up to $100,000 per property, with funds in your account in just 2 business days. The property returns the cash out from a fixed portion of the rent over 3 years.
With market conditions suggesting significant opportunities ahead, having quick access to capital could make all the difference in securing your next investment before prices potentially move higher.
