The phrase “overvalued market” is everywhere in 2025, especially when it comes to Australian real estate. With property prices surging over the past decade and interest rates in flux, many are wondering if the dream of home ownership—or a safe investment—has become a high-stakes gamble. Are we living through a bubble, or is this the new normal?
What Does ‘Overvalued’ Mean in 2025?
To say an asset is “overvalued” means its current price far exceeds its underlying economic value, often due to speculation or market hype. In 2025, the Reserve Bank of Australia (RBA) and APRA have both flagged concerns about persistent property price growth outpacing wage increases and rental yields.
- CoreLogic’s 2025 figures show median home values in Sydney and Melbourne have surpassed their previous peaks, with price-to-income ratios now exceeding 8x in most capitals.
- Rental yields have slipped below 3% in many metro areas, lagging behind the cash rate—currently at 4.10%—and inflation, raising alarm bells for investors.
- First-home buyers now require an average deposit of over $140,000 in Sydney, according to Domain’s March 2025 Property Report.
These metrics suggest that property prices are not just expensive—they’re potentially detached from economic fundamentals.
2025 Policy Updates: How Are Regulators Responding?
With overvaluation risks escalating, 2025 has seen a flurry of policy interventions aimed at cooling the market and protecting consumers.
- APRA’s new lending caps: In February 2025, APRA tightened debt-to-income limits, with banks required to scrutinise borrowers with DTI ratios above 6x more closely.
- Stamp duty reform: NSW and Victoria have introduced annual property taxes as alternatives to up-front stamp duty for some buyers, aiming to lower entry barriers but potentially stoking demand further.
- Macroprudential tools: The RBA continues to signal further macroprudential measures if price growth remains untethered from wage gains.
Despite these efforts, price momentum has only slightly cooled in early 2025, with auction clearance rates still high in major cities.
Who’s Most at Risk If the Market Is Overvalued?
An overvalued property market doesn’t affect all participants equally. Here’s who should be most vigilant:
- First-home buyers: Overstretching to enter the market could leave buyers vulnerable to negative equity if prices correct.
- Investors chasing capital gains: With yields at historic lows and rental growth stalling, those banking on continued rapid appreciation may face disappointment.
- Highly leveraged homeowners: Rising interest rates and falling prices could squeeze those with minimal equity, especially if unemployment ticks up.
Real-world example: In Brisbane, a young couple who bought in 2022 at peak prices now finds their home value stagnant while mortgage repayments have jumped by 20% after multiple RBA hikes. If values fall even 5%, they risk being underwater on their loan.
How to Navigate an Overvalued Market in 2025
- Stress-test your finances: Use conservative assumptions for interest rates and property values before committing to a purchase.
- Look beyond the hotspots: Regional and outer-metro areas may offer better value and yield prospects, though they come with different risks.
- Prioritise fundamentals: Focus on properties with strong rental demand, access to infrastructure, and realistic long-term growth prospects.
Remember, while “overvalued” doesn’t guarantee a crash, it does signal the need for caution, due diligence, and a clear-eyed assessment of your own risk tolerance.
