The 2025 Economic Pivot: Year-End Wrap-Up & 2026 Outlook
Executive Summary: The 2025 Economic Pivot & 2026 Outlook
2025 in Review – “The Grand Reversal”
The year began with optimism as the RBA cut rates to 3.60% by August.
December marked a sharp pivot: the RBA ended its easing cycle and signalled potential hikes in 2026 to combat resurgent inflation.
Key Market Dynamics
Property Market: National dwelling values rose ~8%, driven by supply shortages. Perth, Brisbane, and Adelaide led with double-digit gains; Sydney and Melbourne lagged due to affordability constraints.
Investor Dominance: Investors accounted for 40.6% of new lending, supported by low vacancy rates and rising rents (+5%).
First-Home Buyers: Despite government incentives, affordability pressures pushed FHBs into units and apartments.
Inflation & Monetary Policy
Inflation rebounded to 3.8% in October; trimmed mean remains at 3.3%, above target.
RBA’s hawkish stance aims to cool demand without immediate hikes, but early 2026 increases are likely.
Banking Response
Big Four banks raised fixed rates by up to 0.35%, reflecting higher wholesale funding costs and margin protection.
2026 Outlook
Cash Rate: Expected to rise to 3.85% (Feb/May).
Property Prices: Growth moderates to +5–7% amid tighter credit and APRA’s new DTI caps.
Unemployment: Slight uptick to 4.3–4.5% as credit conditions tighten.
Implications
Homeowners: Prepare for 0.25–0.50% higher repayments; refinancing risk for high DTI borrowers.
Businesses: Lock in financing early; expect softer consumer spending and prioritise cash flow management.
The 2025 Economic Pivot: Year-End Wrap-Up & 2026 Outlook
From an economist’s perspective, 2025 will be remembered as “The Grand Reversal.” The year began with optimism as the Reserve Bank of Australia (RBA) delivered three rate cuts by August, bringing the cash rate down to 3.60%. But by December, the mood shifted dramatically. The final RBA meeting acted as a cold shower for markets—signalling the end of the easing cycle and raising the spectre of rate hikes in 2026.
1. The 2025 Property Market: An Investor’s Playground
Despite interest rates remaining high compared to the previous decade, the property market showed remarkable resilience, driven by a chronic supply-demand imbalance.
Price Performance: National dwelling values are set to finish 2025 around 8% higher. Growth was uneven: Perth, Brisbane, and Adelaide posted double-digit gains, while Sydney and Melbourne lagged due to severe affordability constraints.
The Investor Surge: Investors dominated the market, accounting for 40.6% of all new mortgage lending by year-end. With vacancy rates near historic lows and rents rising another 5%, the “buy-to-rent” thesis remained strong.
First-Home Buyer Struggles: Despite government initiatives like the Help to Buy scheme and expanded 5% deposit guarantees, first-home buyers were largely confined to units and apartments as house prices continued to outpace wage growth.
2. Inflation’s Rebound & the RBA’s Hawkish Turn
The key driver behind the RBA’s shift was the persistence of service-side inflation.
The Data: Inflation dipped to 2.1% mid-year but rebounded sharply to 3.8% in October. The RBA’s preferred measure—trimmed mean inflation—remains at 3.3%, above the 2–3% target band.
The RBA Logic: In her final 2025 address, Governor Michele Bullock warned that the economy is running too close to capacity. By ruling out further cuts and signalling potential hikes in 2026, the RBA aims to “jawbone” the market—cooling consumer spending before resorting to actual rate increases.
3. Why Fixed Rates Are Rising Now
Following the RBA’s December announcement, the Big Four banks (CBA, Westpac, NAB, ANZ) moved swiftly to lift fixed-rate products by up to 0.35%. Why?
Wholesale Funding Costs: Banks borrow on global swap markets to fund fixed loans. The RBA’s hawkish tone pushed up swap rates, making 2- and 3-year funding more expensive.
Margin Protection: With rate cuts off the table, banks are locking in higher margins to safeguard against volatility in 2026.
Risk Management: By raising fixed rates, banks are signaling that the bottom of the cycle has passed.
2026 Outlook: Predictions & Pivot Points
2026 Forecast
RBA Cash Rate
3.85% (Feb/May hike) CBA and NAB expect a “fine-tuning” hike to curb inflation.
Property Prices
+5% to 7% slower growth as higher-for-longer rates and APRA’s new DTI caps cool demand.
Unemployment
4.3% – 4.5% slight uptick as tighter credit conditions weigh on businesses.
What Does This Mean for You?
For Home Buyers & Mortgage Holders
Mortgage Prison Risk: APRA will introduce a 20% cap on high DTI loans (>6x income) from February 2026. Highly leveraged borrowers may struggle to refinance later in the year.
Budget Stress-Test: Households should prepare for 0.25%–0.50% higher repayments. On a $750k loan, two hikes would add roughly $240/month.
For Businesses
Cost of Capital: The “easy money” expectations of early 2025 are gone. Lock in financing now before commercial lending rates climb further.
Consumer Sentiment: With the RBA actively cooling the economy, discretionary spending (retail, hospitality) will soften in early 2026. Cash flow management will be critical for SMEs.
Barco Finance Team