The perfect storm is starting to dissipate as new year brings change of gears
Australian house prices grew by an average of 8.6% in 2025, a result that smashed the collective wisdom of market analysts and far exceeded the previous year’s 5.2% result.
There was a myriad of contributing factors at play, principally three interest rate cuts from the Reserve Bank of Australia (RBA) and the introduction of generous first-home buyer government incentives, combined with the evergreen issue of widespread housing stock shortages.
“Rate cuts tend to be associated with an upswing in property prices unless there has been a recession and sharply rising unemployment,” explained AMP Bank’s chief economist Shane Oliver (pictured).
“2025 was no exception with prices starting to rise from February when the RBA started cutting rates,” he continued. “Roughly speaking, the three 0.25% rate cuts added around $35,000 to how much a buyer on average earnings could borrow. Of course, this was more than swamped by a rise in median home prices of $71,400 last year.”
Oliver added that below average listings played a major role in the buoyant 2025 housing market, “as vendors held back for higher prices and as lower interest rates relieved the pressure to sell for some distressed mortgage holders”.
He said: “While a slowing in population growth and improving housing completions brought the property market into better balance on (an) annual basis, there was and still is an accumulated housing shortfall – of around 200,000 to 300,000 dwellings – that has built up over the last few years of under building.”
Housing market cools in December
But while the conditions made for fertile ground in 2025, numerous headwinds are gathering in the new year.
First and foremost is the emerging threat of rate hikes from the RBA. While this seemed like an implausible situation mere months ago, the renewed inflation fears have made it a possibility, if not a probability.
Westpac became the last major bank to remove rate cuts from its 2026 RBA forecast, while Commonwealth Bank economists have raised the prospect of not one by two hikes in the near future.
If analysts’ forecasts prove accurate, it could help keep the lid on price growth over the next 12 months.
It may already be happening, with house price growth slowing to 0.7% month on month in December 2025.
“This is partly seasonal, but likely also reflects intensifying talk of rate hikes turning home buyers more cautious,” said Oliver.
While Oliver sees Australian house prices continuing to climb in 2026, he anticipates a cooler result of around 5-7%.
“This is based on our view that the RBA leaves rates on hold this year. But if rates start to rise again home prices could fall slightly,” he said.
