What will happen to house prices in Australia in 2025?
Australia’s housing market is in a downturn for the first time in almost two years after the average national price of a property sold dipped slightly in December.
Introduction – Sustained growth in house prices.
Considered in aggregate house prices in Australia are a determined by a complex mixture of personal (idiosyncratic) reasons such as location, land size, condition of the property and macro indicators such as interest rate, the state of the economy, population growth and government policy. These reasons do not need to be mutually inclusive because the demand for housing in Australia is heavily segmented between investors, current occupants and those currently constrained from entry.
Each of these sectors respond differently to different drivers however within the aggregate housing market the idiosyncratic reasons tend to be fixed in the short run whereas the macro reasons are more subject to cyclical variation. Irrespective of individual drivers, most capital cities in Australia have seen substantial growth in house prices over the last 5 years.
Table 1 Growth in Capital city house prices 2020-2024
| City | Annual average percentage increase |
| Sydney | 7.0 |
| Melbourne | 7.8 |
| Brisbane | 12.1 |
| Adelaide | 14.0 |
| Perth | 21.0 |
| Hobart | 6.85 |
| Darwin | 0.08[1] |
| Canberra | 7.7 |
As well, over the past 5 years, average house prices in most Australian capital cities have significantly outpaced inflation. While inflation rates have fluctuated, peaking at around 7.8% in December 2022 and currently sitting around 3.8%, house prices have seen much higher growth rates (https://propertyupdate.com.au/inflation)
Segmented Housing Market
The data shown in table 1 is not surprising as real estate is not just for individual domestic purposes but seen in Australia as a default investment strategy. This investment motivation segments the housing market. According to recent data, about 25% of Australians own at least one residential property besides their primary residence. This means that roughly 20% of Australians own more than one house. On the other hand, approximately 31% of Australian households are renters. This percentage has remained relatively stable in recent years. Allied to this are the findings that a significant number of Australians aspire to buy their own home but are hindered by high property prices. Recent research indicates that the average income required to buy a house without falling into housing stress is $164,400 per year, which is more than 1.5 times the average income. Taken collectively, the major current drivers of house prices are.
- Location
- Land Size
- Condition of the Property
- Market Conditions
- Economic Indicators
- Population Growth
- Government Policies
The first three reasons are essentially idiosyncratic and are more suited to predicting the spatial distribution of housing demand rather than its aggregate level. In the first part of this brief examination, I will concentrate on the last three, economic conditions, population growth and Government policies in predicting the course of prices in 2025.
Economic Indicators
In 2025 the predicted economic growth rate for Australia in 2025 is around 2.5% to 3%. with Western Australia highest at 3 % and Tasmania lowest on 1.8 %. This forecast considers factors like inflation, interest rates, and global economic conditions. Economists expect a moderate pick-up in growth as the effects of high inflation dissipate and consumer confidence improves with potential interest rate cuts. However, even if these improvements do take place, I do not see this as adding to, or even, stabilising average house prices. For many, interest rate cuts will fuel demand in consumer spending, including leisure, rather than reheating the housing market. Most Australians will see this as respite from cost-of-living pressure rather than a signal for more capital investment
Population Growth
The predicted population growth in Australia for 2025 is expected to be around 0.2% to 0.9%. Over the last three years, the average annual growth rate has been approximately 1.4% (www.abs.gov.au) This is a significant predicted slowdown in population growth and will reduce total aggregate demand for housing. Depending on what happens with Government policy, this may be offset by the pent-up demand from currently excluded buyers, although it is doubtful that small reductions in interest rates will place these buyers in the housing market
Government policies
Courageous Government policies could change the housing market in Australia and begin to introduce long term stability and sustainability to the housing market. These policies must include attempts to reduce the current level of segmentation in the market. Relevant to the design of such policies is a long term and bipartisan view as to what adequate housing constitutes in Australia; is it a social good, essentially a human right? or is it part of the aggregate an asset and investment market to be left to the free market? If the latter, Government policies should be aimed at reducing institutional and Government imposed on-costs and freeing up more available land. If the former, Governments must reduce the attractiveness and the level of their active support for housing investment and speculation and direct investment capital where it is not competing with entry level home buyers. Hopefully Governments do not resort to populist and futile policies like freeing up superannuation to be used for deposits or raising first home buyer incentives. These schemes do more harm than good and primarily benefit real estate agents. However, in an election year, any Government courage or decisiveness is unlikely and the electorally popular policies such as freeing up superannuation may prevail.
Conclusions and predictions for 2025
During this time Interest rates are tipped to fall with a couple quarter percent rate cuts predicted but this will likely fuel consumption in areas other than increasing the demand for housing. The slowdown in population growth will also ease aggregate demand for housing. If government policies remain on hold and the incumbent Government resists the temptation to bring in populist but self-defeating measures such as allowing early access to superannuation, then housing prices in Australia will continue a slow downward pathway, dropping on average about 5% by close of 2025. The largest falls being in those States that led the recent boom, Western Australia, South Australia and Queensland. Already the high end properties in these State and throughout Country have either fallen in price or taken more than expected time to sell (https://www.realestate.com.au/advice/how-to-sell-a-luxury-home/) A fall of this magnitude does not indicate a systematic drop in the asset value of housing but rather a mild and long overdue correction in an overheated market. It also provides which ever Government is returned an opportunity to start to tackle the imbalance in housing markets, recognising the segmented nature of the market and determining whether access to suitable housing is to be seen as a collective social good or just another avenue for investment,
[1] From 2020 to 2024, the average annual increase in house prices in Darwin was 0.8%. This relatively modest growth reflects the unique market conditions in the city during this period.
