Home value growth to accelerate in FY 25-26

With home values starting to rise again and interest rates falling, I expect home value growth to be stronger over the current financial year.

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Over the 2024-25 financial year, national home values, according to the Cotality Home Value Index, increased by 3.4%. The +3.4% change in home values over the year was well down over the previous financial year. However, home values have now increased each month since February 2025 which coincides with the commencement of the cash rate reduction cycle we’re now in. Interest rates have since been reduced by a further 25 basis points to 3.85% in May 2025.

Factors weighing on the home value outlook

Interest rates

The cash rate has already been lowered by 50 basis points which has led to a return to growth in home values across the nation. Current market pricing has the cash rate bottoming at around 3% and remaining at that level until the end of the financial year. This would represent a cash rate which is 125 basis points lower than it was at the start of 2025 and at least 75 basis points lower than it is today.

Each 25 basis point reduction in the cash rate (assuming it is all passed on to borrowers) increases borrowing capacity by about 2.5% so with the two rate cuts we’ve already had and potentially a further three cuts, borrowing capacities will have increased by 12.5% from the beginning of the 2025 calendar year.

125 basis point reductions to the cash rate in a 12 month period, don’t happen very often and they have historically led to increases in property prices thereafter.

Housing affordability

While dwelling values are already increasing on the back of recent reductions in home values, Australia already has some of the world’s most expensive housing. Over the past five years, national dwelling values are +44.3% and over the past decade they are +65.6%.

Growth in dwelling values continues to far outstrip broad inflation and is well above growth in household incomes. Affordability in my view is one of the major constraints to housing values growing at a faster pace than they may given a potential 12.5% increase in borrowing capacities.

Population growth

The latest data shows that annual population growth at the end of 2024 had slowed from 633,804 persons to 445,924 persons. More up-to-date overseas arrivals and departures data suggests that the slowing of population growth may have stalled. Either way, population growth and migration remains high on an historic basis.

I expect population growth and migration will slow further over the 25-26 financial year but the slowdown that the federal government is targeting will take longer than expected to achieve. The ongoing high rate of population growth necessitates more housing and with most of the pressure felt initially in the rental market, it may encourage more renters to move into home ownership (incentives for first home buyers will similarly encourage more buying).

New housing supply

The annual number of dwelling approvals is trending higher and over time, this increase will start to result in higher commencements and completions. Property developers have still seen a rapid increase in construction costs and higher interest rates mean higher financing costs which drive up the end price of new development and narrow margins making new construction less viable.

Lower interest rates will assist with feasibility of new development but the absence of overseas investors will limit new unit construction, as will the fact that new prices in many markets are well above existing prices making it hard to achieve presales targets.

I expect housing construction to increase over FY 25-26 but continue to fall well short of the Housing Accord target. Most of what I expect to be built over the coming year will be new greenfield housing and high priced units targeted at a downsizer demographic which sadly means low levels of new rental stock and a volume of new housing which remains well below the target.

Existing stock for sale

A key determinant of home values is the demand for properties but also the supply.

In cities like Sydney, Melbourne, Hobart and Canberra we’ve seen total supply start to moderate a little but it remains elevated compared to recent year. On the other hand, Brisbane, Adelaide, Perth and Darwin continue to see quite low volumes of stock for sale.

Stock can shift quite quickly but lower interest rates should increase demand and that should lead to a moderation in the volume of stock for sale. A lower supply of existing stock will also lead to more demand for new housing as would-be buyers may find it hard to source the right property for them in a market with tight supply and lots of competition.

Cost of renting

In the majority of instances it remains much cheaper to rent than buy within the same suburb, of course many people don’t buy in the same suburbs that they are renting in. With strong population growth and limited new housing supply it is likely that rental rates will continue to climb over the coming year albeit I expect growth to be slower than over recent years.

As interest rates fall this may afford some renters a small window in which to exit their rental property and take out a mortgage which costs less than their rent. I expect this opportunity coupled with the ongoing strong competition for rental stock will see more people wanting to purchase their first home (and government incentives are likely to support them too).

Macroprudential policy

Macroprudential policy at this stage looks unlikely to change but if it does it could impact on house price expectations. Tighter policy would likely result in lower value growth and vice versa.

At this stage, it looks as if the 3% serviceability buffer will remain in place and I am not anticipating any changes over the year.

Labour market

The labour market has been the main bright-spot for the Australian economy over recent years. At the time of writing economic growth is particularly weak as is household spending whilst the unemployment rate sits at 4.1%, significantly lower than before the pandemic.

If the labour market remains tight as interest rates fall and households lift their spending then this will likely also support higher home values. In the event that unemployment spikes (which is not currently the base case but I expect some increase in the unemployment rate over the year) then home value growth is expected to be weaker than forecast.

Broader economic conditions

The hope from the RBA will be that as interest rates fall household spending and economic growth lifts. There’s been little sign of this occurring to date although it can take some time.

I expect that lower rates and more contained inflation will result in a moderate improvement in economic conditions which will also support higher demand for housing as interest rates are lowered.

Government policies

Government policies, especially those over the second half of the financial year, will support higher market participation from first home buyers. From January 2026 the federal government’s Help to Buy Scheme will see the federal government contribute a portion of the purchase price, up to 40% for a new home and 30% for an existing home. This model allows first home buyers to purchase with as little as a 2% deposit and to avoid LMI.

Both Queensland and Tasmania are proposing similar schemes and I expect that we will see many first home buyers eager to access these schemes.

From the start of next calendar year we’re also going to see a tax on super balances over $3 million. There is a decent chance that one of the ways in which people attempt to avoid this tax is to purchase (that is upgrade) their principal place of residence to a more expensive property, owner-occupied property is of course tax free outside of stamp duty and council rates. These tax changes could fuel more demand for premium housing.

Nationally and capital city value growth forecasts

National

Following a value change of +3.5% over the 24-25 FY I expect that national dwelling values will rise between 6% and 8% in FY 25-26. This growth will be fuelled by lower interest rates, government support for first home buyers, persistent strong population growth and insufficient new housing supply.

Sydney

Despite having the most expensive housing in the country, I expect that demand will increase as interest rates fall. I also expect some of the excess stock on the market for sale to be sold in the coming months. As a result I am forecasting that home values will rise 6% to 8% this year.

Melbourne

Melbourne still has a lot of stock for sale and while I expect stock levels to ease, higher taxes in the state and a weaker economy is likely to see a relative underperformance in terms of value increases. Personally I think Melbourne is a good buy right now but I am only anticipating value growth of 4% to 6% over the coming year. It could be the market to watch over the following year if value increases pan-out as forecast.

Brisbane

Brisbane is now an expensive market but plenty of people are still coming across the border and there is significant demand for construction workers and acute shortages of them. As a resident I worry about affordability and liveability of the region with infrastructure investment not keeping pace. I expect values to rise 7% to 9% over the coming year.

Adelaide

Adelaide is rarely the best or wort performing market. Supply of stock remains low, new stock additions are also low and it is still a relatively affordable market with a great lifestyle. Lower interest rates should fuel more demand and see values rise 7% to 9% over the year.

Perth

A strong economy, strong population growth, great lifestyle, very little stock for sale and constrained new housing supply is likely to see strong growth in values over the coming year. The fact it is still relatively affordable and most homes are close to a beach is another tick for the market and I expect values to rise 9% to 11% this year.

Hobart

There’s still a lot of stock on the market in Hobart but relative to most other capital cities it offers good value. As always, the challenge is employment opportunities and the ageing population, but I am expecting values to climb 4% to 6% this year.

Darwin

This market has seen values rise by just 4.2% over the past decade. The region enjoys strong employment opportunities, strong rental demand from a transient population and very attractive rental returns plus affordable housing relative to other capital cities. I expect it to be one of the best performing markets with values to rise 9% to 11%.

Canberra

The city still has quite a lot of established stock for sale and has delivered quite a lot of new housing over recent years however, new stock additions have slowed substantially over the past year. I think Canberra could see stronger growth than most are expecting with values rising between 5% and 7% this year.

In conclusion

I think the general public is getting a lot more switched-on to what typically happens as interest rates are reduced and are realising that lower interest rates tend to lead to higher property prices. Given this along with the strong recent increases in home values over recent years, many people wanting to upgrade will be looking to do so sooner rather than later, increasing demand and pushing home values higher.

Furthermore, we are seeing significant stimulus to first home buyers with more to come in 2026 and we know that historically first home buyers have taken advantage of this stimulus and it has led to higher property prices.

These are the main reasons by these somewhat strong forecasts for home values over the coming financial year.

I’d love to hear your thoughts, am I too bullish, not bullish enough, completely absurd with some of my predictions? Let me know.