VIC
ECONOMIC AND RESIDENTIAL MARKET REPORT Q3 2025
Executive Summary
Michael Staedler General Manager Research, Data & Insights m.staedler@rpmgrp.com.au
• Economic growth improved to 0.60% in Q2 2025
• Consumer confidence is lifting, attributed to real wage growth
• Interest rate cuts are supporting a recovery in dwelling investment
• Government spending remains high, although growth is moderating
Australia's economy grew 1.3% over FY24/25, marking the lowest annual rate since 1992 (outside of the pandemic affected periods). Activity picked up during the first half of 2025, with quarterly GDP rising 0.6% in Q2, providing some momentum after a subdued start.
Private demand drove much of this recovery. Real wages outpaced inflation, while the July 2024 tax cuts and two 25 basis point rate reductions in February and May 2025 supported household spending.
Household consumption rose 0.89% over the quarter, the strongest gain in two and a half years. Growth was led by discretionary categories, and the household savings ratio declined, signalling rising consumer confidence. Strong population growth, estimated at 423,357 persons nationally over the year to March 2025, further lifted demand.
Dwelling investment continued to recover from late 2024, increasing 0.35% in Q2. Lower interest rates and easing housing inflation encouraged buyer activity, translating into higher approvals and commencements, alongside increased renovations and extensions.
Business investment remained subdued. Weak productivity growth is weighing on profitability, while the completion of major mining and renewable energy projects, coupled with delays in new capital expenditure, constrained non-dwelling construction and machinery investment.
Public demand is still a significant share of GDP, but growth is slowing. Budget pressures are prompting federal and state governments to restrain spending, delaying or extending the timelines for upcoming infrastructure projects.
This edition of our Economic and Residential Market Report offers a clear view of where the economy stands. We hope it offers greater clarity and confidence as you navigate your development goals.
For more information, please visit: www.rpmgrp.com.au
Our Research Consultancy Services create bespoke reports crafted to your specifications, translating rich data into in-depth analysis. For a bespoke report, email the team at: contactus@rpmgrp.com.au
This
Economic Update
Gross Domestic Product
Economic activity rose 0.6% in Q2 2025, supported by household and government spending, while investment remained subdued.
Real wages and interest rate cuts have lifted consumer confidence, driving higher household consumption, with strong population growth providing an additional boost. Improved affordability has increased turnover in established dwellings, while easing housing inflation is supporting new residential construction and renovation activity.
Gains in dwelling investment, however, were offset by weak private business investment, particularly in engineering construction. Public investment also slowed from recent highs, as budget pressures and delayed infrastructure projects constrained growth.
Household Savings Ratio
Current Savings Rate 4.2%
Higher disposable income and improved outlook for household finances encouraged increased spending in Q2, leading to the household savings ratio decreasing.
Long Term Savings Rate (2015-2019) 5.9%
Average Savings Ratio = 5.9% 2015-2019
Peak Savings Rate During Covid
Historically low interest rates, combined with lockdown mandates restricting mobility and spending choices, allowed households to build solid savings buffer through the pandemic.
Household Consumption
Discretionary spending rose 1.4% in Q2, marking the strongest quarterly gain in three years. Growth was supported by rising consumer confidence, seasonal factors, and end of financial year sales.
Spending on hotels, restaurants, recreation, and consumer goods lifted notably, while essential spending grew a more moderate 0.5%.
Category Consumption Increases
Category Consumption Decreases
Source: Australian Bureau of Statistics
Interest Rates and Inflation
The cash rate was cut three times in 2025 (in February, May, and August) falling from 4.35% to 3.60%. These reductions have flowed through to borrowers, with the discounted standard variable rate down 98 basis points since February, exceeding the 75 point cut the cash rate as competition among lenders intensifies.
Lower borrowing costs are supporting household spending and broader economic activity, helping sustain buyer confidence and engagement in the housing market.
Consumer Price Index (CPI) rose 1.34% in Q3, lifting annual inflation to 3.24%; the strongest quarterly gain in two and a half years and pushing the rate above the RBA’s 2-3% target range.
Electricity was the main driver, with prices up 9% over the quarter. Within the housing category, property rates and charges recorded their highest quarterly rise in more than a decade, increasing 6.4%. the new dwelling index also lifted 1.1%, as improved market sentiment saw rebates and incentives reduced across the new home sector.
New Dwelling and Rental Index
Source:
Wage Growth vs. Inflation
In Q2 2025, WPI rose 0.84% quarterly and 3.37% annually, outpacing CPI and boosting real wages. Low unemployment (around 4%) reflects a tight labour market supporting wage growth. Inflation was tempered by government rebates, easing cost pressures, and housing incentives, helping maintain household purchasing power despite rising wages.
Victorian Employment and Unemployment
+26,966
Unemployment Rate - September 2025 4.7% Net Gain in Employment - Q3 2025
Victoria’s employment was volatile over Q3 2025. Full time jobs rose 24,884 in July but fell 17,720 across August and September. Part time employment fell 27,747 in July before recovering 47,549 positions over the next two months.
Annual jobs growth is slowing, with total employment up 1.52% to September 2025, down from 3.39% the previous year. Despite moderating growth, labour force participation remains relatively high, contributing to a small rise in the unemployment rate, which edged up to 4.7% in September.
Source: Australian Bureau of Statistics
Consumer Sentiment Index
Consumer sentiment has improved since late 2024 but remains below neutral, peaking at 98.5 in August 2025 before easing to 95.4% in September. Households may be more confident in their own finances but concerns over the broader economy (particularly following higher than expected inflation in August) have weighed on overall sentiment.
More consumers now expect rising unemployment and remain uncertain about future interest rate cuts, prompting caution in spending. Despite this, strong population growth is likely to support household expenditure, keeping it a key driver of economic growth through the second half of 2025.
Consumer Sentiment Index (Index-100)
Business Confidence
The NAB Business Survey showed conditions improving from June after a slow start to 2025. The Business Conditions Index rose to +4.3 in August, averaging +3.8 over the past three months. Gains were driven by employment and profitability, supported by slowing growth in purchase and labour costs. Capacity utilisation also increased, signalling stronger operational efficiency.
In Victoria, business conditions returned to positive territory, underpinned by rising confidence in preceding months. By industry, business services (including property) outperformed other sectors.
NAB Business Conditions Index
Source: National Australia Bank Survey
Victorian Population
Victoria’s population grew by 45,472 persons in Q1 2025. This was 4% lower than the same quarter last year, reflecting a slowdown in net overseas migration. Despite this, overseas arrivals remained the main driver of growth, accounting for 76% of total increase.
Over the year to March 2025, Victoria’s population rose an estimated 124,588, which is broadly in line with pre pandemic (six years to March 2020) annual averages.
Victorian Population Components
Natural Increase +10,367
An improving outlook for the economy and household finances has seen a lift in births, resulting in a net gain of 10,367 persons from natural increase in Q1 2025. This was 60% higher than the previous quarter and the strongest quarterly increase in four years.
Net Overseas Migration +34,665
Net overseas migration is always strongest in Q1, reflecting the influx of international students at the start of the academic year. In Q1 2025, net migration recorded a solid inflow of 34,665 persons, though this was 13% lower than the same quarter in 2024. The decline reflects a slight reduction in permanent migration and tighter caps on overseas student enrolment.
Net Interstate Migration +440
Interstate migration, which turned negative at the onset of the pandemic in March 2020 and remained so until late 2024, is showing signs of recovery. With Melbourne now relatively more affordable than most other capitals, Victoria recorded a small net inflow of 440 people in Q1 2025. However, over the year, the state still posted a net outflow of 2,318 people.
Melbourne Residential Market
Melbourne Residential Market
Melbourne’s residential property market peaked in Q4 2021 after a 36% surge in median house prices over two years, reaching a record $1,125,000. Unit prices rose more modestly, up 11% to $690,500.
Price growth was expected to moderate from 2022, but rising inflation prompted the RBA to tighten monetary policy from May 2022 through November 2023. Over 19 months, interest rates rose 435 basis points, triggering a sharp market correction.
Early 2024 brought signs of stabilisation, supported by strong population growth and growing confidence that rates had peaked. House prices lifted 1.6% in Q1 2024, though cost of living pressures and inflation concerns limited buyer sentiment. By year end, the median house price had fallen to $898,000 (a 20% decline from the 2021 peak) while unit values dropped 10% to $623,500.
Conditions improved through 2025 as two rate cuts in the first half of the year eased affordability pressures and drew more buyers back into the market. Over the first nine months, median house prices rose 6.3% and units by 3.5%. By Q3, house values reached $954,500, up 2.7% for the quarter and 4.5% year on year, while units climbed to $645,500, up 2.1% for the quarter and 3% annually.
The new home market, which weakened sharply through 2022 and 2023 as higher interest rates and construction costs eroded purchasing power, remains incentive driven. Developers have continued offering rebates of around 5-10% to support the sales of titled and near titled lots. The headline median lot price rose 1.5% in Q3 to $399,000, but after an average 7.5% rebate, the effective median was closer to $369,100.
Melbourne Residential Property Prices
Owner Occupier Loans
24,545
Stronger growth among FHBs lifted their share of total new owner occupier loans to 42% in Q2. Improved affordability and rising buyer confidence are driving this increase, reflecting a renewed willingness among households to enter the market or upgrade as borrowing capacities increase. No. of Owner Occupier Loans - Q2 2025
New owner occupier loan commitments rose 18% in Q2 2025, reaching 24,545 loans, supported by two interest rate cuts in the first half of the year. Both first home buyers (FHB) and non-FHBs responded, with quarterly growth of 21% and 17% respectively.
Source: Australian Bureau of Statistics
Average Loan Size by Buyer Type
Over Q2 2025, the average home loan size rose 2.1% for both FHB and non-FHBs. FHBs reached a record $528,426, while non-FHBs averaged $717,894, just below their peak three years ago.
Income tax cuts from July 2024 (equivalent to one interest rate reduction) along with two early-2025 rate cuts, have expanded borrowing capacity. The gap between FHB and non-FHB loan sizes widened slightly over Q2 to $189,468, up 21% from a year ago, though still below the Q2 2024 peak of $213,141.
Victorian New Loan Commitments
Count of Applications
Victorian Construction Activity - Approvals
Approvals by Dwelling Type
Total dwelling approvals - Q2 2025
Total approvals fell 9% in Q2 2025 to 12,662, largely driven by a 53% drop in apartment approvals. High presale thresholds continue to challenge project feasibility, and the sharp quarterly decline highlights how a single large apartment development can skew overall figures.
In contrast, approvals for detached houses and townhomes rose 9% and 12% respectively. Improved affordability and moderating construction costs supported stronger new home demand, particularly for titled lots, lifting detached house approvals to 8,107. Medium density development also strengthened, with townhome approvals reaching 2,650 across infill and greenfield areas.
Over FY24/25, total dwelling approvals reached 56,320, which is 9% higher than the previous year but still 11% below the ten year annual average.
Victorian Construction Activity - Commencements and Completions
Total Dwellings
Total Commencements - Q2 2025 13,828
Total commencements fell 6.9% in Q2 2025 to 13,828 dwellings. House commencements declined 3.3% to 7,531 (the lowest quarterly result in eight years) following historically low approvals in Q1. With new home demand recovering in Q2, house starts are expected to improve through the second half of 2025.
Other dwelling commencements, supported by strong apartment approvals in late 2024 and early 2025, remained relatively robust. Q2 recorded 6,297 starts, down 10.7% from Q1’s 7,055, but still elevated compared to prior periods.
Dwelling completions totalled 12,662 in Q2, up 5.7% from the previous quarter but 25% lower than a year earlier. It is important to note that quarterly completion figures can fluctuate significantly due to project timing and delivery schedules.
Outlook
Michael Staedler
General Manager
Research, Data & Insights
m.staedler@rpmgrp.com.au
Household consumption growth surged 0.89% in Q2 2025, a notable positive for the economy.
Consumers appeared more confident in spending their extra disposable income, supported by wage growth outpacing inflation, the July 2024 tax cuts, and interest rate reductions in early 2025. The household savings ratio fell to 4.2%, contributing to stronger than expected GDP growth for the quarter.
Rising consumption has, however, sparked inflationary pressures, as demand for goods and services grows faster than the economy’s supply capacity. Headline CPI for Q3 exceeded expectations, rising 1.3% for the quarter and 3.2% annually, while trimmed mean inflation (the RBA’s preferred measure) lifted to 3.0% annually, near the top of the target range.
This outcome effectively rules out a fourth rate cut in 2025 and may delay further easing, though the current cash rate of 3.60% remains slightly restrictive, leaving room for future reductions if inflation eases.
Unemployment edged up from mid-2025. The national rate of 4.5% in September still reflects a tight labour market, but some softening
may occur if household consumption slows in response to no further rate cuts, reducing demand for goods, services, and labour. Even so, strong population growth should continue to support consumer spending and modest GDP growth into 2026.
In the property market, improved affordability following three rate cuts in 2025 has unlocked pent up demand, boosting dwelling investment. This is evident in higher turnover of established homes and increased vacant lot sales. Over the year to August 2025, new dwelling approvals rose more than 12% on the previous corresponding period, with further residential construction expected to continue supporting dwelling investment.
For more information, please visit: www.rpmgrp.com.au
Our Research Consultancy Services create bespoke reports crafted to your specifications, translating rich data into in-depth analysis. For a bespoke report, email the team at: contactus@rpmgrp.com.au
Our Team
Research, Data & Insights
Michael Staedler
General Manager
Research, Data & Insights m.staedler@rpmgrp.com.au
Andrew Raponi
Senior Research Manager a.raponi@rpmgrp.com.au
Laurence Rao
Research Manager - VIC laurence@rpmgrp.com.au
Simon Brinkman
Research Manager - QLD & NSW simon@rpmgrp.com.au
Executive, Sales and Marketing Leadership
Luke Kelly
National Managing Director
Built Form luke@rpmgrp.com.au
Rod Anderson
National Managing Director Communities rod@rpmgrp.com.au
Peter Grant
National Managing Director Business Development peter@rpmgrp.com.au
Imogene Schaefer
General Manager
Marketing imogene@rpmgrp.com.au
Michael Vilar
General Manager
Medium Density michaelv@rpmgrp.com.au
Greg Rankin
General Manager Communities gregr@rpmgrp.com.au
Johnathon Driessen
General Manager
Communities johnathon@rpmgrp.com.au
Tim Hyland
National Strategy Manager
Transactions & Advisory tim@rpmgrp.com.au
Unlocking Australia’s Property Landscape
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