Slowdown in House Price Growth Expected for 2025 in Australia Despite Interest Rate Cuts
Australia’s property market is poised for a notable deceleration in house price growth in 2025, even in the face of potential interest rate reductions in the coming year. According to new research conducted by consulting firm KPMG, house prices are expected to rise by merely 3.3% in 2025, a stark contrast to the over 5% growth witnessed in 2024. This forecast suggests that while the housing market may still be on an upward trajectory, the pace at which prices are climbing will significantly taper off.
Chief economist at KPMG, Brendan Rynne, provided insights to SkyNews.com.au, explaining that the anticipated three rate cuts throughout 2025—which are likely to amount to a 75-basis point reduction—will still leave the cash rate considerably higher than it was at the beginning of 2022 when it hovered near zero. Rynne articulated that the anticipated ease in rates, while beneficial for housing affordability and reducing mortgage stress for existing homeowners, would not serve as a comprehensive solution to reinvigorating house prices to unsustainable heights.
While house prices are projected to take a hit, the performance of apartment units suggests a different narrative. KPMG’s analysis anticipates that unit prices will maintain a growth rate consistent with 2024, averaging an increase of approximately 4.5%. This divergence in the growth patterns between houses and units can be attributed to various dynamics in the buyer demographic and ongoing supply challenges. Rynne pointed out that downsizing trends among middle-aged and senior citizens, who are selling their larger family homes to invest in more affordable units, have propelled the demand for apartments. This trend emphasizes a broader spectrum of buyers now engaging with the unit market, which contrasts with the behavior observed previously where demand may have heavily leaned towards younger purchasers.
Compounding this demand for unit properties are significant supply-side challenges, notably rising construction costs, which have seen a staggering 40% increase over the past couple of years. Rynne elaborated that these costs necessitate higher pricing from unit developers, thus driving prices upward in conjunction with the growing demand. The expectation of a broad market equilibrium, where housing supply matches demand, remains distant; KPMG forecasts this balance will not be achieved until around late 2026.
Peninsula and Perth are projected to observe the most significant house price growth in the immediate future, with estimates suggesting an increase of around 4% this coming year. In contrast, Melbourne’s real estate market, after experiencing a dip of 3% in 2024, is expected to rebound strongly in 2026, potentially seeing a 6% increase in house values. Sydney is expected to follow a similar pattern, with growth anticipated in the same two-year cycle.
This cyclical behavior in Australia’s housing market has become a recurring theme, characterized by initial surges in home prices followed by a phase of self-correction and stabilization. Rynne observed that historically the Australian housing market frames itself around strong upswing periods, eventually transitioning into phases of price correction, which can lead to stagnation in nominal terms accompanied by a decline in real prices over a subsequent three to four years.
Furthermore, with every major Australian bank now predicting interest rate cuts by the Reserve Bank of Australia in February 2025, the economic landscape appears to be aligning for a potential market shift. Recent data reflecting strong trimmed mean inflation figures have bolstered market sentiment, heightening expectations that a significant drop in interest rates may be imminent.
In conclusion, while the forecast for Australian property prices indicates a slowdown in growth for 2025, the housing market dynamics are complex. With reduced interest rates expected and the evolving landscape of buyer demographics heavily influencing market trends, the landscape in which homebuyers and investors operate is shifting continuously, paving the way for a nuanced understanding of future property valuations. The coming years will be crucial as Australia navigates these changes, framed by fluctuating currencies and construction costs, ultimately reflecting the broader global economic climate.
