An auction in Dulwich Hill, Sydney. Interest rate cuts are likely to have the most impact on Sydney and Melbourne house prices. Steven Siewert
Residential property prices could rise by just 3 per cent nationally in 2025, with anticipated rate cuts expected to revive a cooling market, according to property experts and economists surveyed by The Australian Financial Review.
A slowdown is already evident with residential prices dropping 0.1 per cent in December, the first decline at the national level in almost two years. Sydney and Melbourne led the downturn as the market struggles to absorb the large amount of stock for sale and buyers grapple with high borrowing costs.
“We expect prices have further to fall in Sydney and Melbourne and soften in other main capital cities over the next six months, but for momentum to improve over the second half of the year, boosted by rate cuts and real income growth, meaning that prices are unlikely to fall through calendar year 2025,” Barrenjoey chief economist Jo Masters told The Australian Financial Review quarterly property survey.
The 2025 outlook of 3 per cent growth represents a significant slowdown on last year’s growth, when prices rose 4.9 per cent nationally by the end of year despite the December slowdown.
Perth, Adelaide and Brisbane bolted ahead last year, gaining 19.1 per cent, 13.1 per cent and 11.2 per cent, according to CoreLogic. Sydney prices were up just 2.3 per cent by the end of the year and Melbourne’s fell 3 per cent.
But even the runaway growth in the smaller capitals is tipped to ease this year, as buyers baulk at high prices. A key indicator for where prices go next is the weekly auction clearance rate, which had slumped to just over 50 per cent of properties changing hands by the end of last year.
“Auction clearance rates are indicative of the weakness in the housing market and are consistent with further price falls in Sydney and Melbourne,” Ms Masters said.
“Stock on market is above the five-year average in Sydney and Melbourne, where dwelling prices are now falling, and are recovering toward that average across the rest of the country, where house price growth is moderating.
“Borrowing capacity is set to remain constrained for some time longer as household income is improving more slowly than we had thought and we move our first rate cut from February to May.”
Election dampener
Barrenjoey is tipping 1.4 per cent growth in house prices nationally in 2025, with Brisbane prices rising 4 per cent, Sydney up just 0.6 per cent and Melbourne down 0.5 per cent.
Jarden chief economist Micaela Fuchila said a clearance rate of above 65 per cent usually leads to price growth six months ahead.
“Hence, the current conditions suggest house prices are likely to move sideways in the near term, with average clearance rates below 60 per cent,” she said.
Cameron Kusher, REA Group’s executive manager for economic research, is tipping prices to rise at a national level by between 1 per cent and 4 per cent this year, with growth in Perth and Adelaide peaking at 6 per cent, and Brisbane at 5 per cent.
“We are already seeing property price growth slow in most markets along with a rise in the amount of stock for sale. This is creating more balanced conditions between buyers and sellers, affording buyers more choice and requiring sellers to be more flexible on price expectations,” he said.
Interest rate relief is unlikely before the middle of 2025, while the looming federal election will also be a dampener for the housing market, Mr Kusher said.
Residential property prices have been grinding relentlessly higher over the past two years despite the surge in interest rates, making residential property unaffordable for many. But that growth now limits further price gains. Sydney’s median price of near $1.2 million is close to $64,000 more expensive than a year ago. In Perth, the median price has jumped more than $152,000 to about $813,000, according to CoreLogic.
“Housing affordability is currently at its worst level since 2008, with 47 per cent of gross household income required to service a mortgage nationally,” Oxford Economics Australia’s senior economist Maree Kilroy said.
“This ongoing constraint on buyers continues to divert demand towards properties at lower price points.”
Year of two halves
The outlook for the 2025 housing market hinges on how soon and by how much interest rates may be cut. Experts polled by the Financial Review expect sluggish growth initially, with a pick-up later in the year if interest rates fall.
Jarden’s Ms Fuchila is tipping a 9 per cent rise by year end, driven by the smaller markets of Adelaide, Perth and south-east Queensland.
Also taking a more sanguine view is Sameer Chopra, CBRE’s chief economist, who expects prices to rise by 6 per cent to 8 per cent if the Reserve Bank delivers three rate cuts.
“I expect the market will be caught off-guard by the extent of pent-up demand and response to how lower rates start to improve affordability, particularly among the lower/mid-tier price segments,” he said.
As well as being a two-speed market across the capitals, the 2025 outlook is also shaping as a tale of two halves. Barrenjoey analysis shows that after two months of price falls, the average length of the downturn is seven to eight months, with price declines typically accelerating after five months.
Shane Oliver, AMP chief economist, expects prices to rise nationally by 3 per cent after further weakness in prices over the next six months.
“Lower interest rates should help from mid-year though to drive a renewed upswing providing the economy stays out of recession and unemployment only rises to around 4.5 per cent,” Dr Oliver said. “If not, all bets are off and house prices are likely to fall through the year as a whole.”
Louis Christopher, SQM Research founder, has a base case for national prices rising between 1 per cent and 4 per cent, after factoring rate cuts of up to 50 basis points and continuing strong population growth. That forecast ranges from up to 19 per cent in Perth, while Sydney and Melbourne are in the doldrums with falls of between 1 per cent and 5 per cent.
The effect of the anticipated rate cuts will vary across different markets, according to Ray White chief economist Nerida Conisbee. Typically, rate cuts have had the most impact on Sydney and Melbourne house prices, she said.
“This cycle, however, the impact could be greater in other capital cities, primarily because house prices are so much more expensive compared to when we last had a cut.”
Looking more closely at buyer behaviour, Nicola Powell, Domain’s chief of research and economics, said even an initial rate cut could trigger a FOMO [fear of missing out] feedback loop, reigniting confidence and prompting aspiring buyers to get in ahead of anticipated price rises.
“This urgency is amplified in areas with constrained housing where buyers seek to secure purchases as financing becomes more attainable. Such behavioural shifts could bolster demand and contribute to upward price pressure,” she said.
On the downside, though, are a range of factors that may weigh on buyers’ minds, not least economic uncertainty, both domestic and global.
“Concerns of geopolitical tension and the potential for a global recession may dampen buyer confidence, causing many to delay significant financial commitments such as purchasing a property,” Dr Powell said.
“Domestically, subdued business investment and reduced consumer spending could create a more cautious economic environment, further reducing demand for housing. This hesitancy may particularly affect the high end of the market, where buyers are more sensitive to market volatility.”
Domain expects prices to rise between 4 per cent and 6 per cent nationally, ranging from Perth house prices gaining up to 10 per cent and homes in regional Victoria falling as much as 5 per cent.
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