Interest Rates vs House Prices in Australia 2025: What to Expect?

By 2025, the Australian housing market will take some serious turns due to factors such as hiked interest rates and changing market dynamics. Understandably, there is much interest on behalf of homeowners and investors in finding out how changes in interest rates impacted house prices. So let's figure out how the expected interest rates in the year 2025 will influence the prices of housing, the demand, and eventually the affordability of the same.

Interest rates are the cost of access to money, determined by a higher power, usually the Reserve Bank of Australia. The rates will determine how much the lenders will charge for home loans and personal loans.

This means the RBA increases or decreases interest rates to control inflation and, in turn, stabilize the economy. It is because of economic conditions such as inflation or deflation that the RBA increases or cuts in the cash rate causing ripples on how banks price their loans.

Higher interest rates increase the cost of borrowing; therefore, mortgage repayments are more expensive, and the affordability of housing drops because potential buyers have greater costs. Conversely, lower interest rates are usually followed by lower mortgage payments, which let more people enter the property market.

The interest rates are projected to have a dynamic year in 2025. According to KPMG, the rates could stabilize or slightly increase, depending on how inflation performs and the overall performance of the global economy.

Meanwhile, the expectations of banks, economists, and analysts vary. While some—including Commonwealth Bank and Westpac—predict a small rate increase to help keep inflation at bay, others foresee a period of stabilization without upward or significant adjustment.

Events worldwide, such as changes in the US Federal Reserve's policy setting, or China's financial performance, even down to fluctuations in the energy markets, carry a big whammy on the rates in Australia. In turn, these will set the course of Australian monetary policy in 2025.

Because of an increased interest rate in 2025, the likely effect is that the demand for housing would be cooled. The higher costs of borrowing could keep buyers away and depress property prices. That could be an opportunity for the investor in the long view but a problem perhaps for those who need to sell now.

A period of rising interest rates is usually accompanied by the adjustment of property prices, especially in major urban centres.

Normally, an interest rate decrease would have people more into the properties, as the mortgage rates are lower; thus, it is easier for buyers to be able to afford homes. That could see demand push house prices upwards, though it may also fuel fears of affordability by first-time buyers.

So should you buy a property now or wait? Note that lower rates often spur investment; this, in turn, may sometimes lead to higher competition for a limited housing supply and drive prices even higher.

Inflation and government policy, like the grants and tax incentives for home buyers, will also mould the housing market. If inflation is higher, then the RBA may keep interest rates high enough to lean on the price rises, which in turn would be reflected in housing prices.