New research reveals the top regional areas for rental yields
By Melissa Singer
While the past two years have showcased remarkable resilience, affordability pressure, uneven regional growth and interest rate uncertainty are reshaping the property landscape.
Government reforms aimed at addressing affordability and supply are underway, but their impact will be gradual. Meanwhile, high interest rates and living costs are pushing buyers towards smaller homes and more affordable markets, in particular in mid-sized capitals such as Perth, Brisbane and Adelaide.
These cities were the standouts in 2024, with their affordability, lifestyle appeal and housing demand creating strong momentum.
In contrast, Sydney, Melbourne, Hobart, Canberra and Darwin have faced softer conditions, highlighting a growing divide between the thriving markets and those constrained by economic and demographic challenges.
Interest rates are projected to ease in the first half of 2025, but Eliza Owen, head of research at CoreLogic, says rates will still be above pre-Covid averages.
"It's uncertain whether that in itself would trigger a significant upswing in national home values," says Owen.
"Lower rates could improve borrowing capacity, but they're also a signal that we're past the worst of cost-of-living pressures, which could drive higher sales volumes."
The prospect of rate cuts is already fuelling optimism. The Westpac-MI consumer confidence index rose by 5.3% to 94.6 in November 2024, its highest level since April 2022, buoyed by moderating inflation and expected real income growth.
Still, the Reserve Bank's forecast of rising unemployment to 4.5% by mid-2025 tempers the outlook, particularly for more vulnerable markets.
But affordability remains the biggest issue. In late 2024, the median dwelling value-to-income ratio reached eight, and saving a 20% deposit now takes more than a decade for most households.
These pressures are forcing buyers to rethink their priorities, with demand rising for apartments and properties in outer-suburban markets.
"We've hit a point in the cycle where unit growth is outpacing house price growth, and peripheral suburban markets are attracting buyers priced out of city-adjacent areas," says Owen.
First-home buyers and investors are concentrated in these more affordable segments, navigating borrowing caps and equity constraints to secure properties. This trend is likely to persist in 2025, with buyers prioritising value and accessibility.
Regional markets shine
The regions have outperformed the capitals, leading the nation in value growth, rental increases and yields in 2024. As the population grew by 615,000 in the year to March 2024, Queensland and Western Australia stood out, with strong population growth of 3.1% and 2.5% respectively, bolstering housing demand.
"Affordability and lifestyle advantages were key drivers for these regions," says CoreLogic economist Kaytlin Ezzy.
"The cost-of-living crisis and interest rates pushed some renters and buyers further afield, creating renewed momentum for regional markets."
Housing supply is beginning to recover, with approvals reaching a 15-month high in September 2024. However, elevated construction costs and long timelines mean many projects remain uncompleted, so supply challenges will persist, in particular in high-demand areas.
Where investors are looking
Investors are taking a measured yet opportunistic approach to 2025.
While national rental values rose just 0.1% in December 2024 to be 4.8% higher for the year, investors looking for cashflow and capital gains will focus on mid-sized markets "like Perth, Brisbane and Adelaide, where yields are strong and demand is underpinned by population growth and affordability", says Ezzy.
However, she cautions against oversupply risks in locations with significant high-density developments, which could weigh on long-term values.
Buyers advocate John Pidgeon, of Envisage Property, is seeing a growing sense of urgency among his clients, many of whom are 'getting their ducks in a row' in anticipation of the rate-cutting cycle.
"The general belief is interest rates will drop this year, and investors want to get in before that happens, to take advantage of any price growth," he says.
At the same time, investors are carefully balancing short-term risks with long-term gains, targeting markets with strong fundamentals while avoiding oversupplied areas with high-density developments.
Long-term potential
The housing market is likely to remain uneven in 2025, reflecting varied regional dynamics and economic conditions.
Nerida Conisbee, Ray White's chief economist, expects further softening in Sydney, Melbourne, Hobart and Canberra, citing higher interest rates and slowing economic and population growth.
Conversely, cities such as Perth, Brisbane and Adelaide are poised for continued growth, supported by population gains and strong infrastructure investment.
"Interest rates will stay relatively high, so buyers should avoid overstretching and keep buffers for repayments," she says. "Strong infrastructure and job opportunities will be better indicators of long-term growth potential than short-term price trends."
As the market navigates another year of uncertainty, buyers and investors must remain adaptable and informed.
LJ Hooker economist Mathew Tiller anticipates a busy start to the year. "Once interest rates drop, the increase in new listings we've seen coming to market since spring will turn into sales," he says.
CoreLogic's Owen will be monitoring interest rates, unemployment and regulatory oversight, and while rate cuts are likely to boost demand, a weaker labour market could limit buyer capacity.
"Despite some softening in the market in early 2025, it is expected activity could pick up later in the year alongside lower interest rates, higher real income growth and improved affordability in markets like Melbourne," she says.
"While we do expect values to finish higher in 2025, the pace of increase will probably be softer than the 4.9% achieved in 2024."
Regulation will also play a role, with the Australian Prudential Regulation Authority's cautious stance on housing credit growth ensuring the market doesn't overheat. For those prepared to act decisively, 2025 offers opportunities in markets supported by strong fundamentals.
As Tiller puts it: "2025 is shaping up to be a highly active market with strong interest, and much of that will depend on interest rates".
Get stories like this in our newsletters.