Expert discusses several factors that will influence property values this year
As 2025 begins, changes in Australia’s economic environment are expected to influence the housing market. While inflation moderates, unemployment edges higher, and residential construction adapts to demand, the market faces a complex year ahead.
According to Eliza Owen (pictured above), head of research at CoreLogic, several factors, including lower interest rates, evolving lending policies, and migration trends, will play a critical role in shaping the sector.
“We are entering a transitional phase for the housing market as pandemic-driven conditions subside, and broader economic adjustments take hold,” Owen said.
Interest rate cuts may bring only modest gains
The Reserve Bank of Australia (RBA) could begin cutting interest rates as early as February, with inflation trending lower. Core inflation dropped to 3.2% annually in November 2024, below the RBA's December forecast of 3.4%. However, experts caution that the effect of lower rates on housing values and sales may be limited.
Even with a significant reduction in the cash rate — potentially to 3.1% by late 2025 — a median-income household could afford a property valued at $593,000, far below the current median home price of $815,000. Owen highlighted how borrowing capacity may not significantly lift market activity.
“While reduced rates could alleviate repayment pressures, the current mortgage serviceability challenges and higher-than-average interest rates compared to the 2010s may limit the overall boost to buyer demand,” she said.
Regulatory policies hold the key
Macroprudential measures could amplify or constrain the impact of rate reductions. The Australian Prudential Regulation Authority (APRA) may review its 3% mortgage serviceability buffer, potentially lowering it to 2.5%. Such a move could increase borrowing capacity, but APRA has signalled caution.
In its November statement, the regulator emphasised concerns over financial instability tied to high household debt. Should household debt rise alongside declining rates, Owen said APRA could implement stricter lending conditions, including limits on high loan-to-value ratio (LVR) or debt-to-income (DTI) loans.
Unemployment and income trends: mixed signals for housing
The RBA projects unemployment will rise to 4.5% by the end of 2025, up from the current 4.0%. While this reflects a loosening labour market, Owen suggests this may not dampen housing values.
“For the past two decades, higher unemployment has often coincided with reduced interest rates, which can stabilise or even support housing values,” she said.
Owen added that young Australians, a group disproportionately affected by unemployment, are more likely to rent than own property. As a result, job losses in this cohort may primarily affect rental demand rather than home values.
Migration trends to ease rental pressures
Net overseas migration, which peaked at 556,000 in 2023, is expected to decline to around 340,000 by mid-2025, according to the Centre for Population. This reduction marks the fading of the “COVID catch-up” effect, where international border reopenings led to a surge in arrivals.
Rental markets, particularly in areas with high migration exposure, could see less demand pressure. Regions that experienced sharp rent increases after borders reopened may now face a stabilisation or slight decline in rental growth.
Residential construction faces headwinds
The residential construction sector is grappling with low new home approvals and a backlog of unfinished projects. As of November 2024, only 169,000 new dwellings were approved, a 24% drop from the decade average. High construction costs and diminished buyer confidence continue to weigh on the sector.
“While housing approvals remain subdued, they appear to have bottomed out in early 2024, particularly in growth markets like Western Australia and Queensland,” Owen said.
Despite this, competition for labour and materials, particularly from public infrastructure projects, is likely to persist, slowing productivity in home building.
“Overall, despite rate cuts and easing inflation, 2025 is expected to see lower value growth and sales numbers than last year,” Owen said. “This could involve a shallow downturn in values at the start of the year, followed by a mild recovery as inflation and interest rates move lower, real incomes rise and housing supply remains low.”
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