‘Undervalued’ Melbourne to Reap Rate Cut Advantage

The Reserve Bank of Australia has delivered its second interest rate reduction of the year, cutting the cash rate by 25 basis points to 3.85 per cent. And, say property experts, Melbourne’s undervalued market could be among the biggest beneficiaries. The move, which brings rates below 4 per cent for the first time in three years, is expected to improve project feasibility across the sector and boost consumer confidence, particularly in markets that have underperformed in recent years. Domain chief of research and economics Nicola Powell believes Melbourne is well positioned for a strong rebound after the decision. “This is a market that has been undervalued and underperformed for many years. It’s been our weakest capital city over the past five years and historically that doesn’t normally happen,” Powell told The Urban Developer . The dual impact of rate cuts and Melbourne’s relative affordability creates a distinctive opportunity for the market, according to Powell. “Markets like Sydney and Melbourne at a higher price are more sensitive to changes in economic conditions, so when a cash rate cut comes, it tends to be amplified through those property markets quicker,” Powell said. “What I suspect is you’ve got this dual reaction that’s going to occur in Melbourne where you’ve got the rate reduction, and you’ve got that value as well that Melbourne has offered—that undervalued nature of that housing market.” Powell said that buyer interest had already been building in Melbourne over recent months, with “double-digit annual increases in buying inquiry” from December through March, suggesting momentum was building even before the cut. Oliver Hume chief economist Matt Bell said global factors might have influenced the RBA’s decision. “The turmoil abroad kicked off by Trump’s ‘Liberation Day’ tariffs announced in April changed the game,” Bell said. “Even if the originally announced policies are only partially implemented, they are probably disinflationary for the world outside the US.” ▲ Matt Bell, Nicola Powell and Sara Abraham. Bell said this global economic backdrop “trumped the risk that a still-tight labour market would keep pressure on domestic inflation” in the RBA’s considerations. Building and Construction Foundation executive director Sara Abraham said the rate cut “could improve project feasibility across the sector, unlocking stalled developments, boosting confidence, and ultimately increasing the pipeline of work”. “A stronger flow of projects means more capacity in the sector, more apprenticeships, more job openings, more opportunities,” Abraham told The Urban Developer . Molti director Ben Teague said the cut’s impact on sentiment extended beyond the reduction itself. “It’s not so much how a rate cut impacts people’s bottom line, it’s about showing people what direction things are heading in,” Teague said. “For the property industry, especially in the luxury space, it’s not so much whether buyers can afford mortgages, but it’s more around settlement confidence in the sector.” While most economists had anticipated the quarter-point cut, some market watchers had expected a more aggressive half-percentage point reduction. Teague said the size of the cut plays a crucial role in shaping market sentiment. “The 0.25 per cent is great, but a more aggressive 0.5 per cent move would let people know we’re in a rate cut cycle and they’ll have more confidence around where things are heading,” Teague said. ▲ Ben Teague, Tim Lowe and Aaron Gravias. “There’s a massive difference between 0.25 per cent and 0.5 per cent from a sentiment and confidence perspective for boosting the market. That would really get things rolling.” The decision is expected to have a substantial impact on residual housing stock. “With residual stock, because it’s already built, an interest rate cut is all about sentiment—when people see rates heading in a certain direction, they’re going to have more confidence around purchasing property,” Teague said. Lowe Living co-founder Tim Lowe agreed and said that while rate cuts might not directly impact all market segments, they created better conditions overall. “For our primary market, downsizers, these rate cuts won’t have too much impact on their ability to borrow or purchase—however, it will create better market conditions for the potential sale of their own existing property,” Lowe told The Urban Developer . Beyond residential property, the industrial sector is also expected to benefit from the rate cut. Gravias director Aaron Gravias said that “higher rates have made buyers more cautious and tightened project feasibility”. “But any future rate cuts would help unlock demand from both owner-occupiers and investors, and improve financing conditions for both purchasers and developers,” he said. ▲ The RBA’s rate decision is expected to drive growth in the industrial market. Looking beyond this cut, property experts anticipated a measured approach to further rate cuts from the RBA. Powell forecast quarterly reductions through the rest of 2025. “I think we’re going to have multiple rate cuts but they’re going to be spaced now. It’s like cut, let’s breathe, see the impact and then make the decisions thereafter,” she says, predicting quarterly cuts that could mean a cash rate drop to “about 3.35 by the end of the year.” The RBA’s decision comes at a particularly opportune time for Victorian developers as a new report from Colliers Engineering &amp; Design revealed that development costs have stabilised across the state. The report shows costs per lot in Victoria have levelled at $133,000 on average, marking a 9.6 per cent year-on-year increase—significantly lower than the post-Covid surges recorded in previous years. Regional variations exist within Victoria’s development landscape, with Melbourne’s west notching increases of 7 per cent at Melton and 7.7 per cent at Wyndham, while the south-east, particularly Casey, experienced a steeper rise at 18.4 per cent, driven by complex site conditions requiring extensive earthworks. According to the Colliers report, with fewer active projects in the pipeline, developers now have greater access to authority, consulting and contractor resources. “The slowdown in the Government’s Big Build program has also eased supply-side pressures, creating a window of opportunity for developers to advance key designs and tender works while rates remain competitive,” the report said. Colliers Engineering and Design state director for Victoria Rob Spenceley said “now is the time to push forward with infrastructure design and tenders” as “delays in action could lead to higher rates and extended timeframes once demand surges again.”

‘Undervalued’ Melbourne to Reap Rate Cut Advantage

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