Economy & Property - August 2025

August 2025: Rate Decision, Property & Economy 

The RBA announced its fifth decision for 2025, cutting the official cash rate by 0.25% or 25 points to 3.60%. 

Money markets were broadly expecting a third interest rate cut in this cycle, following weak inflation and employment data, insufficiently offset by the uptick in consumer confidence and spending. This result therefore met expectations and the commentary will shift to the timing of any further cuts in this cycle.

Any private sector growth remains largely non-existent, especially in Victoria and NSW, though that has not stopped most asset classes performing strongly.

Retail Sales & Employment

Retail sales have been sluggish for some time, though there was a notable
pickup in June. The six-month annualised rate lifted to 5.4%, the fastest pace since November 2022 according to ABS/ANZ research data.

The lag in time between an interest rate cut and the pick up in these numbers is not an unusual one by historical standards. A false dawn?

The labour market is a little weaker, with less jobs added. Anecdotally it is tougher out there. Growth remains in the public sector, including healthcare and social services, education, public administration and utilities. In the last 12 months, 70% of the job gains since have been from the public sector, pushing the overall total over 30% of all jobs.

Inflation Falls

Inflation rose only 0.7% in the June quarter 2025, with annual inflation increasing 2.1% over the year.  This result is the lowest annual rate since March 2021. 

Again, a reminder that inflation was above 8% in late 2022. 

RBA Positioning

The message from the Governor was fairly directional again, “A measured and gradual approach to monetary policy easing is appropriate” and the bank will wait for more evidence that inflation is sustainably under control.

So markets will have the expectation that rate cuts will roll into later this year.

Shares & Markets

The Australian equity market delivered a net gain over the month, which included a fresh all-time high for the ASX 200 in early August before a pullback and some gentle reminders about global trade uncertainty. The year-on-year return remains robust at over 12%.

The strength was buoyed by expectations of an RBA rate cut in August, positive momentum from international equity markets, and higher commodity prices supporting those connected stocks.

IT and Materials outperformed, with strong gains in sectors linked to technology and mining. Banks and healthcare sectors were more volatile; financial stocks pulled back late in the period on weaker earnings.

Equity Markets Worldwide

The stability (for now) on global affairs in the Middle East was well received by markets. Negotiations on trade tariffs between the US and other countries are in full swing as we speak, so exposed markets will remain jittery.  

Japan is the story, almost back to its glory days where it continued its bull run, recovering losses over the year and charging into the black. The depreciating yen remains a factor that boosted the export competitiveness of Japanese products. In addition, earnings, notably in tech and AI and the tariff deal, were other key factors.

The US rally subsided, for a lot of valid reasons including jobs growth being well below expectations, and of course the delayed rate cuts.

Direction for Local Interest Rates?

A small change regarding future rate trends. The rate fall last month didn't eventuate, so while a fall over the year is still expected, it isn't quite at the same pace.

As a result, the graph shows a fall, then a flattening line for the ASX Cash Rate Futures.

As always, this will change quickly if expectations are not met along the way.

Interest Rates Worldwide

The story of central banks worldwide is one of flexibility and caution after a cycle of rapid rate cuts. With inflation risks and global trade uncertainty, the near-term bias is toward patience. More cuts are possible, but not guaranteed, in the near term.

New Zealand's central bank held its Official Cash Rate (OCR) steady at 3.25% in July, pausing after six cuts totaling 225 basis points since August 2024. The RBNZ signaled a data-dependent outlook, noting that while inflation is within target, risks from both global trade frictions and domestic growth remain. 

The U.S. Federal Reserve again left rates unchanged in July, maintaining the federal funds target range at 4.25%–4.50%. Inflation is still elevated; with any cut likely contingent on clearer signs of softening growth or cooling inflation. The market expectation is now for a possible rate cut at the September meeting, but the Federal reserve states it will be "carefully assessing incoming data".

In the UK, The Bank of England delivered a 25 basis point rate cut in August, lowering the Bank Rate to 4.0%. This marks the bank’s fifth cut since last year. They cited progress in curbing inflation, despite some renewed upward pressure on prices recently. Governor Andrew Bailey describes the current approach as "gradual and careful," with the future path of rates still uncertain but the trend expected to be downward as conditions allow.

The Bank of Canada kept its key interest rate at 2.75% for a third consecutive time, while watching for sustained progress in lowering inflation. Market expectations still indicate a potential rate cut in September, particularly if inflation moderates further or growth falters. 

Central Bank Cash Rates

Before posting any changes today, we compare central bank cash rates and their longer-term 10-year bond yields.

Again this period, the Spread between Cash and the 10-Year was largely unchanged with very little volatility at either end of the curve.

This lack of volatility showed a collective pause on the front end of the interest rate curve. The long term rates shuffled up a little for the first time in a while.

Local Money Markets

Australia’s longer-term interest rates are still trending down. While nothing can be taken for granted, if yields on bonds sustain this, it will continue to deliver lower returns for cash investors and lower costs for borrowers. That said, this has been the story for a while and we are still bouncing around.

The average spread between the cash rate and the 10 year - over a few cycles going back 12 years - is 75 points, so we are edging back there.

Residential Property Performance

The latest monthly residential property results from Cotality (see table below) rose by 0.6% overall in July in both city and regional areas. There are still restraints based on affordability in many markets, with debt-to-income at extended highs. Rate drops will need to be more substantial for this to be impacted.  

Property Trends

The relatively stable conditions led to an uptick in buying and selling activity which was evident in the auction results.

Melbourne is an interesting case study, with median house values more than 15% below their peak levels of Covid times in 2021. The "demise" of Melbourne property is reflected in its improved yield - with the vacancy rate for Melbourne residential property of 2.5% compared to the 10-year average of 2.9% driving yields up. 

Residential rents sit around all-time highs, showing a combination of affordability restraints and potentially a more transient population. Of course, the higher the yield, the lower the expectations are for future capital growth. A situation to watch.

Data from Mortgage Aggregator LMG supports the interest in Melbourne & Victorian property for first-time entrants. Victoria accounted for 39% of all first-home buyer applications by loan value. First-home buyers made up 18% of total mortgage applications in June, which was well above the national average of 13%.

Victoria is becoming the "owner-occupier state", with cheaper housing and additional taxes that frighten the investors away.  

Commercial & Industrial

Confidence is gradually returning as sellers adjust pricing expectations. Focusing on Melbourne (as it has been battered as we know), there is now interest for assets with potential residential conversion. The divide in demand between higher and lower quality assets is very wide - with investor demand dropping for lower quality office space. Tenants are taking less space, but wanting much better quality stock.

Property Council of Australia data showed that Australia’s office vacancy has risen to 15.2% (CBD 14%, Suburban 17%). This marks the highest point in around three decades, as new and in-demand supply hits the market faster than old stock can be absorbed.

As work habits change, businesses are searching for more desirable places for their teams. So, the figures mask that vacancies across the top-end are very low, and very high in lower quality buildings. Melbourne has the highest CBD vacancy rate at nearly 18% (new Work From Home legislation won’t help here), though the vacancy rate in Sydney’s North is around 30% (Crows Nest, St Leonards), which is surprising given new transport hubs, etc.  

There is some optimism that office and the related commercial property sector values have leveled out. Given the sensitivity to interest rate settings, that will also be the driver of any recovery from here. This may deliver office cap rates falling by 100 basis points or 1.0%; meaning the same rental income will be more desirable leading to higher valuations.

Business Conditions

According to NAB Research, SME business conditions fell in the June quarter, which was a slight surprise given the improvement in Q1. Overall there was a third consecutive improvement in confidence, but both conditions and confidence remain well below their long-run average.

The key drag on the overall numbers is led by the biggest states, NSW and Victoria, while business conditions in other states is relatively strong. 

Currency Wrap-Up

The Australian dollar was weaker against the USD, largely from interest differentials that moved against expectations.

There is black ink mostly everywhere else and this reverses the result from the last month. (Some vindication here, as I couldn't figure out why it was all red last month.)

Australia’s strong financial system and open markets do make the dollar appealing to international investors, uncertainty continues to limit broader gains. The AUD remains sensitive to shifts in global sentiment and trade, making it challenging to pick next moves.  

2025 RBA Policy Announcement Dates

We hope you enjoyed our fifth Economy & Property Insights post for 2025, thanks for reading.

Monetary Policy Announcements will be made at 2.30pm on the following Tuesdays in 2025:

•    30 September
•    4 November
•    9 December

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