Australia’s housing finance market finished 2025 with clear forward momentum. Last week’s ABS Lending Indicators data to December 2025 show that the recovery in borrowing activity that began in late 2023 has broadened and strengthened.

Total new loan commitments in December quarter 2025 were 13.4% higher than a year earlier. At 155,744 loans nationally, volumes have moved decisively above their post-rate-shock lows, although they remain below the extraordinary pandemic-era peaks of 2021. The strength of activity in the quarter reflected stabilising interest rates, solid labour market conditions, strong population growth and, critically, the persistent structural undersupply of housing across most capital cities.

However, the February 2026 rate rise, and the prospect of further increases should inflation prove sticky, has introduced a layer of uncertainty. The key question is whether the cyclical upswing in lending can be sustained in a renewed tightening environment.

Investor Activity Continues to Set the Pace

The defining feature of this cycle remains the strength of investor lending.

Investor loans in December quarter 2025 were 23.9% above the same quarter in 2024, materially outpacing the rise seen for both First Home Buyers and Next Time Buyers. Investors now account for 40.7% of all new housing loans nationally, the highest share in several years and a marked shift from the owner-occupier dominance seen during the pandemic stimulus phase.

Several forces have driven this resurgence. Rental markets remain exceptionally tight, with vacancy rates near historic lows across most capitals. Although rental growth has moderated from its peak pace, it remains elevated enough to both match price rises and support gross yields. At the same time, fixed-income returns softened through parts of 2025 and equity markets remained volatile, reinforcing residential property’s relative appeal as a tangible asset backed by strong population growth.

The recovery in dwelling prices through 2024 and 2025 also restored investor confidence that capital growth had resumed, even in a higher-rate environment. The structural imbalance between housing supply and demand has increasingly underpinned expectations that prices will remain supported over the medium term.

However, investors can be more rate-sensitive than owner-occupiers at the margin. The February 2026 rate increase may slow the pace of investor expansion if borrowing costs continue to rise. The resilience of rental growth and yields will therefore be central to maintaining investor appetite through 2026.

First Home Buyers Showing Resilience, but Still Constrained

First Home Buyer activity improved in the December quarter after showing signs of losing momentum in the September quarter, with loan approvals up 9.9% year-on-year. Nationally, 34,013 FHB loans were approved over the quarter, representing 21.8% of total lending.

The improvement appears to have been supported by the Federal Government’s Home Guarantee Scheme, with expectations of eventual rate relief were also supporting sentiment late in 2025.

The uptick highlights the latent first home buyer demand coming from supportive population driven by millennials moving further into family-forming age brackets. However, elevated dwelling prices, deposit requirements and servicing buffers continue to present substantial barriers to entry.

The February 2026 rate rise complicates that outlook. If additional increases follow, borrowing capacity for new entrants will tighten further, potentially tempering the improvement in FHB participation. In this environment, First Home Buyer activity is likely to remain highly sensitive to both interest rate expectations and targeted policy settings.

Next Time Buyers Regaining Confidence

The Next Time Buyer segment (primarily upgraders and downsizers) recorded 5.7% year-on-year growth in December quarter 2025, with 58,383 loans approved nationally. This cohort accounts for 37.5% of all lending.

Improving price stability through 2024 and 2025 helped rebuild confidence among existing homeowners. Equity gains over the past cycle have provided many upgraders with the financial capacity to transact, while downsizers have responded to improved market certainty and demographic shifts.

Importantly, the interplay between purchaser types remains central. A stable or expanding First Home Buyer segment provides the entry-level demand that allows existing owners to move up the housing ladder. Any renewed slowdown in FHB activity due to higher rates would therefore have flow-on implications for turnover further up the chain.

Investors have been gravitating to new housing

Interestingly, the latest figures show investors are diversifying their focus. Apartments have historically dominated investor portfolios. However, the number of investor loans for land and new dwellings have nearly doubled since 2020, and investors now make up 44% of all loans for new housing construction.

The increased appeal of the greenfield market reflects concerns around high-rise construction quality and the elevated prices of off-the-plan apartments, both consequences of the post-COVID surge in building costs. This shift will have downstream implications, increasing supply in outer-suburban rental markets.

Speculated changes to Capital Gains Tax policy could also impact this equation, particularly if the CGT discount is set at a larger level for investors in new dwellings than for established stock.

State and Territory Trends

The improvement in lending in the December quarter 2025 was broadly based but varied in intensity across states.

New South Wales and Victoria both recorded strong investor-driven growth. NSW saw total lending rise 19.5% year-on-year, while Victoria recorded 16.8% growth, with investor loans surging nearly 38%. After several years of relative underperformance, Victoria in particular appears to be benefiting from renewed investor interest seeking value opportunities.

Queensland, South Australia and Western Australia continued to expand, but at a more moderate pace than earlier in the cycle. Queensland’s growth has eased as affordability pressures become more pronounced following several years of rapid price appreciation. Western Australia, after a strong cyclical upswing, is also showing signs of transitioning from boom conditions to a more sustainable growth phase. Notably, these markets seem to have resp

Tasmania and the Northern Territory recorded renewed strength, albeit from smaller bases, while the ACT posted steady gains.

Renewed rate tightening may have uneven impacts. Markets that experienced the strongest price growth and affordability compression may prove more sensitive to additional increases in borrowing costs.

Outlook

The housing finance market entered 2026 with solid cyclical momentum. However, the February 2026 rate increase may potentially alter the trajectory from here.

The Reserve Bank has painted a more moderate outlook in 2026 and 2027, In this environment higher borrowing costs will weigh more on household consumption and dwelling investment. Offsetting this, population growth remains strong, and the structural undersupply of housing is unlikely to be resolved quickly, which should continue to support prices and underlying demand.

Nevertheless, further rate rises would:

Investor participation is likely to remain comparatively resilient provided rental conditions stay tight. However, the pace of expansion may moderate relative to the strong gains seen through 2025. Possible changes to the Capital Gains Tax discount may influence investor demand at the margins. CGT for existing dwelling holders is likely to be grandfathered, although there could be some impact on demand to new buyers in the market.

First Home Buyers are the most exposed to renewed tightening once the sugar hit of the First Home Buyers Guarantee is worked through. Any additional increases to rate would likely slow their recovery and may limit their share of total lending unless offset by further policy intervention.

Overall, lending volumes are expected to stabilise or grow more modestly through 2026. Structural supply shortages, strong migration and limited new dwelling completions provide a supportive floor, but the renewed tightening bias in monetary policy introduces a cyclical ceiling.

In this environment a period of moderated but sustained activity is expected rather than a sharp contraction, particularly if rate increases remain gradual and inflation continues to trend lower over the medium term.

For further insight into housing market activity and what it means for your business, contact Angie Zigomanis at [email protected] or Rob Burgess at [email protected]