The Reserve Bank has cut the cash rate to 3.85%, its second reduction this year, as inflation returns to the target band for the first time since 2021. This monetary easing comes amid a worsening housing supply crisis, with Australia projected to fall 262,000 homes short of the government's five-year target despite construction costs rising 30.8% since COVID-19.
While the cut delivers welcome relief to mortgage holders, property experts warn it will likely drive up already high property prices, with SQM Research predicting a 10% rise by year-end. This creates both opportunities and challenges for property investors.
"The RBA's second rate cut this year confirms we've entered a significant easing cycle that will fundamentally change property market dynamics. With the cash rate now at 3.85% and inflation back within target range for the first time since 2021, we're seeing investors recalibrate their strategies to capitalise on improved borrowing conditions before the predicted 10% price growth materialises," says Godfrey Dinh, CEO of Futurerent.
Key Highlights
- RBA cuts cash rate by 25 basis points to 3.85%, marking the second reduction in 2025
- A homeowner with an average $660,000 mortgage will save approximately $100 per month
- Combined capital city preliminary auction clearance rate slipped back to 68.8%
- Australia is on track to fall 262,000 homes short of the government's five-year housing target
- Construction costs have risen 30.8% since the onset of COVID-19, hampering development feasibility
- Market experts predict house prices could rise up to 10% by the end of 2025
Rate Cut Impact on Mortgages and Investment Returns
The Reserve Bank's decision to cut the cash rate to 3.85% on 20 May marks the second reduction this year, prompted by inflation falling to 2.9% – the lowest since December 2021 and back within the RBA's target band for the first time in over three years.
For investors, this cut delivers immediate cash flow benefits. On a $500,000 loan with an average variable rate of 6.06%, monthly repayments will reduce by $76, while a million-dollar mortgage will see savings of $152 per month. At least 30 lenders have already committed to passing on the full cut to variable home loan customers.
Markets are pricing in further reductions, with LSEG forecasting the cash rate will fall to 3.1% by early next year. With four RBA meetings remaining in 2025, investors can anticipate additional improvements to their investment returns in the coming months.
Importantly, APRA data shows high-risk lending remains contained, with only 5.8% of loans having debt-to-income ratios above six times at the end of 2024, compared to 24.3% in December 2021. This suggests more sustainable lending practices even as investor activity increases.
Riskier home loans are more contained than in 2021 and 2022
Percentage of loans originated with a debt to income ratio >=6x
This easing cycle is already boosting borrower confidence. "People are generally still borrowing the maximum they possibly can, especially now that confidence is somewhat back in the marketplace," said Theo Chambers, CEO of mortgage brokerage Shore Financial. "They're pricing in future rate cuts – while they can't use that to increase their capacity at the time of purchase, they can stretch themselves to the maximum."
Anthony Landahl, managing director at mortgage broker Equilibria Finance, confirmed this trend: "There's definitely people looking at 'how much can I borrow?' and saying 'if we get another one or two rate cuts, what does that mean for my borrowing capacity?' There's definitely more confidence about people looking to maximise what they can borrow."
Tim Lawless, Research Director at CoreLogic, offers a balanced perspective: "The rate cut is expected to lift consumer confidence - while lower rates should help to make housing more accessible, further upward pressure on prices would offset the benefits of improved loan serviceability."
Housing Supply Crisis Creates Investment Tailwinds
Australia's housing supply shortfall continues to worsen, creating favourable conditions for existing property owners. The National Housing Supply and Affordability Council projects that Australia will build 938,000 homes over the next five years – significantly below the government's 1.2 million target and the estimated demand.
"The supply of new housing is near its lowest level in a decade," the report states. "177,000 dwellings were completed in 2024, falling significantly short of underlying demand for housing, which was estimated at around 223,000 for the same period."
The shortfall stems from multiple challenges. Construction costs have surged 30.8% since COVID-19, and business failures are mounting, with construction company insolvencies rising by 31% from 1,793 in 2022 to 2,349 in 2023. By May 2024, 2,643 construction firms had entered external administration – a 140% increase from 2022.
"Australia's housing shortfall of 262,000 dwellings over the next five years isn't just a statistic – it's a structural market condition that creates long-term tailwinds for property investors. With construction insolvencies and building costs continuing to climb, established properties in supply-constrained locations are positioned for exceptional performance as demand pressures intensify," observes Godfrey Dinh, CEO of Futurerent.
*Forecast **Council estimates
Labor shortages represent another critical constraint. John Bennett, CoreLogic Construction Cost Estimation Manager, explains: "There are not enough trades people to facilitate the required or desired workloads. Unfortunately training or bringing in new people to fill the gaps is not a quick fix. It takes time to upskill a trades person and building industry labor numbers have been declining for some years."
Susan Lloyd-Hurwitz, Council chair, highlighted that "the rate at which we're providing higher- and medium-density housing is roughly half of what it was in 2017 and is due to feasibilities being stretched for developers given interest costs, construction costs and so forth." Housing Minister Clare O'Neil emphasized that resolving the crisis would require long-term commitment: "It takes time to turn the tide on a housing crisis a generation in the making."
For investors, these supply constraints suggest continued upward pressure on both property values and rental yields.
Affordability Metrics and Population Growth: Supporting Investment Fundamentals
Australia's housing affordability metrics reveal a market structurally tilted in favour of existing property owners. The national dwelling price-to-income ratio stands at 8.0, well above the 20-year average of 6.7, while the time required to save a deposit has climbed to 10.6 years from 6.0 in the early 2000s.
Year to Save a Deposit
Renters are also under pressure, with median-income households now dedicating a record 33% of their income to rental payments. This rent affordability crisis underpins potential for continued rental growth for investment properties.
Percentage of Income Spend on Rent in Australia
These affordability challenges are exacerbated by Australia's rapid population growth – the fastest in the advanced world this century. The country's population increased by 2.3% (615,254 people) in the 12 months to March 2024, with 82.9% from net overseas migration. The Centre for Population projects that Australia will add another 13.5 million people over the next 40 years – equivalent to adding another Sydney, Melbourne, and Brisbane to the current population.
With interest rates now falling, we expect the 50.6% mortgage servicing burden to ease meaningfully over the coming months, potentially bringing it closer to the 33% that median households currently spend on rent. However, these metrics aren't going to improve dramatically without a substantial increase in housing supply, which the construction industry simply isn't equipped to deliver in the near term," says Godfrey Dinh, CEO of Futurerent.
Proportion of Income Needed to Meet Mortgage Payments
Auction Results Show Mixed Response
Despite the positive impact of the rate cut announcement, auction markets showed a mixed response last week. After holding above the 70% mark for the previous two weeks, the combined capital city preliminary auction clearance rate slipped back to 68.8%. Nevertheless, this remains slightly above the year-to-date average of 68.0%.
Auction volumes increased to 1,835 across the combined capitals, representing the highest number since the week prior to Easter when 3,066 homes went under the hammer. Melbourne was the standout performer and the only capital city to post a preliminary clearance rate above 70%, reaching 73.8% – the city's second-highest early clearance rate so far this year. A total of 935 auctions were held in Melbourne, up from 799 the previous week but still 7.3% below the levels recorded a year ago.
Sydney showed signs of cooling, hosting 558 auctions (down from 656 the previous week and 23.0% fewer than the same time last year), with a preliminary clearance rate of 65.3%. Excluding the more volatile results from January, this was Sydney's lowest preliminary clearance rate since mid-December 2024.
Strategic Implications for Property Investors
Debt level data from APRA provides additional context for investor decision-making. When interest rates reached rock bottom, almost a quarter of home buyers (24.3% in December 2021) were taking on debts of six times their incomes. This fell dramatically to just 5% by mid-2024 as interest rates rose, and has only edged up slightly to 5.8% by the end of last year.
This data suggests that despite increasing borrower confidence noted by mortgage brokers, lending standards remain significantly more conservative than during the previous low-rate environment. This could indicate a more sustainable growth environment for investors, with reduced risk of market overheating despite the RBA's easing cycle.
The current market presents a unique confluence of factors that investors should consider:
- Rate Cut Advantage: With the cash rate now at 3.85% and projected to fall further to 3.1% by early 2026, borrowing costs are decreasing significantly. Investors who secure financing before these improved conditions are fully reflected in property prices stand to benefit most.
- Supply-Demand Structural Gap: The projected shortfall of 262,000 homes over five years creates persistent upward pressure on both prices and rents. This structural imbalance is unlikely to be resolved quickly given the construction sector's challenges.
- Price Growth Window: With experts forecasting up to 10% price growth by year-end, there's a narrowing opportunity to acquire properties before this appreciation occurs. SQM Research's Louis Christopher explicitly advises acting quickly before affordability resets to previous constraints.
- Construction Barriers to New Supply: The 30.8% increase in construction costs since COVID-19 and 140% rise in builder insolvencies severely limit new supply coming to market. This particularly affects medium and high-density housing, which Lloyd-Hurwitz notes is currently being built at "roughly half of what it was in 2017."
- Population-Driven Demand: The 2.3% population growth (predominantly from overseas migration) continues to drive housing demand across major cities. This demographic pressure supports both rental yields and long-term capital growth prospects, especially in regions with limited development potential.
- Improved Cash Flow Outlook: For existing investors, lower interest rates translate to improved rental yields and cash flow. With markets pricing in further cuts, these improvements are likely to continue throughout 2025-26.
Expert Viewpoint Market Perspectives
Market experts offer different interpretations of the current rate environment and its implications for investors and the broader market.
Domain's chief of research Dr. Nicola Powell noted that while the rate cut is "positive" for both buyers and homeowners, "With these cuts and borrowing power improving, we're likely to see house prices start to rise, especially in Sydney and Melbourne."
SQM Research managing director Louis Christopher forecasts that property prices could increase by 10% by the end of 2025. "It is very likely housing prices will rise from here and continue into 2026," Christopher stated, advising buyers to "move quickly, otherwise they will be back to square one on affordability."
Michael Yardney, founder of Metropole Property Strategists, presents perhaps the most controversial view, arguing that "the real solution to Australia's housing crisis may be rising house prices" because "developers won't build unless it's profitable, and current prices don't support viable returns."
"Most large-scale developers reckon that prices have to rise 15-20% to make taking on the risk of developing new projects viable," Yardney states. "This isn't just about greed; it's about sustainability. If prices continue to stagnate—or worse, fall—then the incentive to build diminishes, further exacerbating the shortage."
Yardney also makes a bold claim for investors: "with strong population growth, continued supply shortages, and falling interest rates, today's prices will seem like a bargain in 10 years."
In stark contrast, financial advisor Scott Pape expresses concern about the rate cut's broader market implications. While acknowledging it helps existing mortgage holders, he warns it would see more of "the wrong people" enter the housing market. "If I was a young person right now I would be pretty pissed off," Pape told news.com.au. "Every time a young person gets close, it just keeps getting more expensive."
How Futurerent Can Help
With interest rates falling and property prices poised to rise, investors have a window to capitalise on current market conditions. Accessing capital efficiently is crucial to execute timely investment strategies.
Futurerent enables property investors to:
- Access up to $100,000 per property (maximum $500,000 across your portfolio)
- Move quickly to secure properties before the potential price growth materialises
- Fund strategic renovations to enhance property appeal and rental returns
- Maintain financial flexibility as market conditions evolve through 2025
Contact our team today to discuss how we can support your investment strategy in this rapidly changing market environment.
