Future Outlook
The Reserve Bank of Australia (RBA) held the cash rate at a restrictive level of 4.35% throughout 2024 to combat persistent underlying inflation. In 2025, however, there have been three cash rate cuts in February, May and August for a total reduction of 0.75% or 75 basis points, bringing the cash rate down to 3.60%.
Despite possible temporary rate increases if inflation remains persistently above target in 2026 and 2027, the cash rate is expected to decline materially in 2028 to a range of 3.00% – 3.60%.
Looking forward, the RBA is transitioning to a phase of easing economic conditions, considering the current tight labour market. From a macroeconomic perspective, this could serve as a catalyst for the real estate market, as the cash rate cuts signal a likely downward trend in borrowing costs thus stimulating investment activities.
“The ultimate question becomes whether newly formed capital will target and anchor commercial real estate this time.”
Substitution-Induced Momentum
Since COVID-19, residential properties have been exceptionally responsive to monetary stimulus injected by the RBA, which has fueled strong momentum in price appreciation. Although their prices remain resilient now, profit margins from new purchases or developments have nonetheless begun to shrink.
One possible scenario is that capital will, sooner or later, start shifting toward commercial properties as a substitute for the overheated residential property market.
Heightened Uncertainty and Demand Drag
Recent headline and underlying inflation remain sticky near or above the upper bound of the RBA’s long-term target range of 2% to 3%, which may slow the pace of further rate cuts. It may take longer than expected for the economy to recover and business confidence to strengthen. If inflationary pressures continue to rise, a temporary rate increase by the RBA could be possible in the short term.
Elevated uncertainty in both the local and global economies is likely to encourage business owners and investors to hold on to capital and postpone investment decisions. This could potentially create a temporary demand drag in commercial properties.
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