The Australian housing market has slipped back into a downturn, as high interest rates and low affordability hinder prospective buyers from home ownership.
The slump is expected to be short-lived, with leading economists at ANZ, Westpac and CoreLogic continuing to forecast full-year gains in home prices.
In December, CoreLogic’s national Home Value Index (HVI) edged back into negative territory, with a 0.1 percent decline that followed swiftly on the heels of a stationary print for November.
This new downturn marks the end of a 21-month growth cycle in home prices, during which nationwide values surged by 14.3 percent before losing momentum in June 2024.
High dwelling prices and interest rates have put heavy pressure on housing demand, with the Reserve Bank of Australia’s (RBA) reluctance to ease monetary policy further compounding housing affordability.
CoreLogic highlights a huge gap between the national median dwelling value of $815,000 and what analysts consider to be an affordable purchase price of $513,000 for a median-income household in Australia.
The Australian Bureau of Statistics reported that headline inflation rose by 0.2% in the December quarter, bringing the annual rate to 2.4%. This deceleration in inflation has led to increased speculation about potential interest rate cuts by the Reserve Bank of Australia (RBA).
In response to the latest inflation data, three of Australia's major banks — Commonwealth Bank, ANZ, and Westpac — now predict that the RBA will cut interest rates in February. NAB remains more cautious, anticipating that rates will remain unchanged in the near term.
Economists at Australian financial institutions expect the downturn to be brief, and for housing prices to bounce back before the end of 2025 to post a full-year increase.
Both AMP and WestPac expect Australian dwelling values to end the year three percent higher, despite a downturn in the first half of 2025.
Shane Oliver, AMP chief economist, said rate cuts by the RBA will give a boost to the market in the second half.
"After rising 4.9 percent in 2024, we expect average property prices to rise around three percent this year, with weak conditions initially followed by stronger conditions in the second half as lower interest rates eventually provide a boost to prices," he said.
Matthew Hassan, Westpac senior economist, made a similar forecast and expects home prices to return to robust growth by 2026.
"After a mixed first half we expect a second-half gain to see dwelling prices up three percent in 2025 with growth lifting to seven percent in 2026 — firmer but still constrained by affordability in most markets,” he said.
Eliza Owen, CoreLogic head of research, said Australia will struggle to see a warming up of the housing market before further price declines or a rate cut from the RBA.
“It’s hard to see any material growth returning to housing values, at least at a macro level, until housing affordability and loan serviceability improves more substantially,” Owen said.
She too expects the cyclical downswing to be short and shallow, given the underlying fundamentals of the Australian property market.
Brian Cullen, associate director, property at CrowdProperty, emphasised that developers should use this period of downturn to reassess their strategies and focus on opportunities in their specific areas of expertise.
"The market is showing signs of a rebound later this year, which means now is potentially the perfect time for developers to review their patch. Understanding local trends and buyer preferences will help ensure projects are well-positioned to meet demand when the market picks up," Cullen said.
"Successful developers don’t just follow the broader market, they analyse micro-markets to identify underserved segments and capitalise on emerging trends. Whether it's targeting infill housing opportunities, optimising designs for affordability, or engaging with local councils to streamline approvals, a well-thought-out approach tailored to your area will pay dividends as conditions improve."
Cullen also noted that timing will be critical.
"It’s not just about securing 'bargains' during the downturn, it’s about strategically aligning your development timeline with the market upswing. Those who do their homework and act decisively in their local markets will be well-positioned to maximise returns when buyer confidence returns."
Rob Flux, educator and developer at the Property Developer Network, said the downturn presents strong opportunities for developers to find bargains as prices trend downwards in the first quarter.
Given a likely rebound in the market before the end of the year, they can also time the completion of their developments for when home prices are on the ascent again.
“They should take advantage of the current market slump to pick up properties at a relative discount, knowing there will be a turnaround once affordability returns and people can get back into the market,” Flux said.
“This is the time to be buying low, doing your development and potentially selling into an upward market by the time you get to the end of your project.”
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The upswing in the Australian property market looks like it’s fast running out of steam, with housing prices barely edging higher in November.
This trend is expected to reverse in 2025, as the RBA prepares to initiate a rate-cutting cycle that is likely to drive strong growth in home values. For this reason, SME developers may want to get into the market during the festive season lull.
Australian housing prices rose by just 0.1 percent in November, according to CoreLogic’s latest national Home Value Index (HVI).
While November marks the 22nd consecutive month home prices have risen, the weak reading has raised concerns the housing market could be on the verge of a downturn.
Tim Lawless, CoreLogic’s research director, says home price growth is fast running out of steam around the country.
“The downturn is gathering momentum in Melbourne and Sydney,” Lawless said.
“The mid-sized capitals, which have dominated the growth of cycle of late, are also losing steam.”
Sydney’s home prices peaked in August before plateauing in September and declining 0.2 percent in October and November.
Melbourne saw housing values fall 0.4 percent over November, bringing its decline for the past year to 2.3 percent. Home prices in the Victorian capital have slipped in 10 of the past twelve months.
The Reserve Bank of Australia (RBA) has left many disappointed this year by holding off on interest rate cuts in the wake of a sharp hiking cycle.
The monetary authority is keeping rates “higher for longer” in a bid to completely crush the post-Covid spike in inflation.
A reduction in interest rates would be welcome to many sectors of the property market, as high borrowing costs continue to place pressure on Australia’s faltering economic growth. Any such cuts are expected to revive the flagging momentum of the country’s home price growth.
While views on the precise timing of cuts continue to differ, analysts are almost unanimous in expecting sizeable reductions to the RBA’s benchmark interest rate next year.
The big four banks all forsee rate cuts by the end of the first half. The Commonwealth Bank expects a reduction in February, while ANZ and Westpac forecast its arrival in May. NAB anticipates the RBA will cut its benchmark rate sometime during the second quarter.
The Organisation for Economic Co-operation and Development (OECD) sees the cash rate dropping to 3.35 percent by early 2026, for a decline of one percentage point.
While cuts to interest rates will reduce borrowing costs, easing inflation could provide a boost to the property sector by reducing construction costs.
Altus Group reports that Australia’s rates of escalation in construction costs have already hit a peak in most major cities, and are set to decline further in 2025.
Escalation rates in Sydney peaked at 7.5 percent per annum in 2022, and are expected to ease to 4.5 percent next year.
Melbourne is following the same trajectory, with escalation rates expected to fall to 4.5 percent per annum next year, after hitting a peak of 7.5 percent in 2022.
This slowdown in construction cost growth is contributing to a sharp pick-up in Australian housing starts.
November saw a 22.4 percent seasonally adjusted pick-up in attached homes, bringing the monthly volume to its highest level since May 2023, at 6130 in total.
KPMG urban economist Terry Rawnsley told AFR that the increase indicated developers had come to terms with cost levels and the likely selling prices for new off-the-plan apartments.
Rob Flux, educator and developer at the Property Developer Network, expects cumulative rate cuts of between one and one and a half percentage points in 2025, with their impact becoming more pronounced towards year’s end.
He advises developers to leverage the holiday slowdown and the RBA's hawkishness in 2024, positioning themselves to capitalise on the inevitable market upswing as the RBA transitions into an extended rate-cutting cycle.
“Everything is going to quiet down until the new year, and not much is going to happen because of Christmas,” Flux said.
“Get in now because your development is going to take 12 months to two years to run its cycle, so you will be selling into an upward market.”
John Lindeman, CEO of Property Power Partner Ltd., points out that the RBA’s current hawkish stance is putting a cap on home price growth in the south-east of Australia. Investor appetites have also been dampened by poor yields on rental properties.
“The continuation of high interest rates is restricting both the number of home buyers and the amounts they can borrow, in turn limiting price growth in the Sydney, Canberra and Melbourne property markets to the lowest priced suburbs,” Lindeman said.
“These markets are not experiencing interest from investors, primarily because rental yields are too low.”
Lindeman instead sees opportunities in regional parts of Australia outside of the south-east, including Western Australia, South Australia and Queensland, partially due to federal superannuation policies.
The most expensive suburbs in Perth, Adelaide and Brisbane have seen huge price gains that will motivate owners to downsize.
This motivation is further strengthened by federal government policies that allow downsizers to put up to $600,000 from the sale of family homes into super tax-free.
According to Lindeman, this will lead to strong demand in regional areas close to those cities, such as Busselton in Western Australia, the Fleurieu Peninsula in South Australia and Hervey Bay in Queensland.
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Opinions or views expressed represent the thoughts of individuals and not those of CrowdProperty or Quay.
Australian home values continued to edge higher in October despite the country's largest cities posting modest declines in dwelling prices.
The Reserve Bank of Australia (RBA) has also opted to keep interest rates on hold, creating bargain-hunting opportunities for property developers and investors over the festive season.
Australia's nationwide home prices managed to eke out an increase for the 21st consecutive month in October, despite modest declines in the dwelling values of the country's biggest capitals.
CoreLogic's national Home Value Index (HVI) posted a 0.3 percent rise for October. Perth led gains, posting a 1.4 percent rise over the month, while Adelaide came in second place with a 1.1 percent increase, followed by Brisbane with a 0.7 percent monthly gain.
In sharp contrast, Sydney and Melbourne both saw home prices decline in October, falling 0.1 percent and 0.2 percent respectively. Canberra also posted a decline of 0.3 percent, while home prices in Darwin fell 1.0 percent.
John Lindeman, CEO of Property Power Partners Ltd, said dwelling values would remain lacklustre in many capital cities until homebuyer demand recovers.
"Buyer demand is sluggish in the other capital cities such as Melbourne, Sydney, Canberra, Adelaide and Darwin, so there has been no opportunity for equity and profit taking as yet."
Tim Lawless, CoreLogic's research director, said worsening affordability and high borrowing costs favoured stronger growth in the value of cheaper housing.
"A combination of less borrowing capacity and broader affordability challenges, as well as a higher-than-average share of investors and first home buyers in the market, is the most likely explanation for stronger conditions across the lower value cohorts of the market," Lawless said.
On 5 November, Australia's monetary authority announced it would keep its target rate unchanged at 4.35 percent, marking a full year since it's made any changes to interest rates.
Headline inflation fell to 2.8 percent in the September quarter, its lowest level in three-and-a-half years.
In an official statement, RBA said it still considers this level to be too high for a rate cut, however, and does not expect inflation to hit the mid-point of its 2 - 3 percent target until 2026.
While the authority has one more meeting scheduled before the end of the year, most Australian economists don’t expect any cuts to the target rate until 2025.
Rob Flux, educator and developer from the Property Developer Network, noted that most economists consider the headline inflation rate to be misleading.
"Economists point out that headline inflation is not a true reflection because it's been subsidised by a whole range of things that have artificially lowered it, including rental assistance and energy rebates," Flux said.
Trump's election win could also delay rate cuts if tariffs and a resurgent trade war breathe new life into US inflation.
This could slow the pace of rate cuts by the US Fed, which could in turn influence RBA decisions, as differences in national interest rates are key to determining exchange rates.
While Lawless highlighted recent stronger growth on the lower end of the housing market, John Lindeman believes a sustained increase can’t be achieved until the RBA kicks off a new cycle of rate cuts.
"Lower priced locations are only growing moderately because prices are too high, rental yields are too low, or there is sufficient supply to meet current buyer demand," Lindeman said.
"These locations would benefit most from a reduction in interest rates (which is now unlikely this year) as it would increase both the number of first-home buyers and their borrowing capacity."
Given the RBA likely won't cut rates until next year, Flux said there could still be bargains available for investors and developers on the Australian property market before the end of 2024.
"Economists predict that interest rates will stay on hold until next year, with most banks expecting the first rate cut to be just a 25 basis point drop potentially early next year," he said.
"The property market is traditionally slower over the Christmas period, and with current rates so high, there might be opportunities to pick up bargains before the start of the new year."
While federal and local governments are eager to tackle the affordability crisis with supportive planning policies and increases in supply, the property market continues to face major roadblocks to the development of new homes.
In May, Reserve Bank chief economist Sarah Hunter highlighted a number of factors that continue to stymie development - including escalating costs and rising infrastructure charges that are undermining project feasibility, causing even those with approvals to stall.
This has resulted in the lowest level of apartment project starts in over a decade, as developers steer clear of risk and mortgage holders struggle to afford the higher prices needed to cover escalating costs.
CrowdProperty CEO David Ingram said risk and project viability issues are hampering developers.
“We work with experienced developers to finance their projects, and there is still strong demand for newly built homes in established areas,” Ingram said.
“Many developers are turning to doing smaller projects because they are less risky to bring to fruition.”
Once the RBA does cut rates, the rise in demand will further push up end prices to reflect actual development costs, contributing to worsening affordability.
To address this issue, Ingram advocates reductions to government fees and charges in tandem with the simplification of regulations to improve project viability.
“We advocate further tax breaks across the spectrum of housing construction to improve the viability of projects, which will help improve housing affordability,” Ingram said.
“This includes infrastructure charge rebates and stamp duty credits for completed projects”
A shift towards detached housing in Australia is reshaping the property development landscape, with the Australian Construction Industry Forum (ACIF) projecting a $6.8 billion increase in the value of detached housing construction over the next two years. However, attached housing construction, which includes apartments and townhouses, is forecast to drop by $4.4 billion.
Speaking to the Australian Financial Review, ACIF’s Construction Forecasting Council chair and chief economist, Nerida Conisbee, said it is very expensive to build apartments.
“Many projects aren’t going ahead, whereas detached housing is looking a lot more positive. It’s on the fringes, it’s quicker and easier to build,” Conisbee said.
The current construction cost landscape is causing projects to shift towards detached housing at the urban fringe, which could exacerbate Australia’s affordability challenges in established urban areas.
“Trying to get affordability in inner-urban areas is further off. We do need to become a more dense country, and this just pushes it further and further away,” Conisbee said in her interview with the AFR.
The widening price gap between existing properties and newly constructed multi-unit dwellings is also a factor.
"If you’re in a suburban area and looking to buy an apartment, it’s far cheaper to buy something that’s already built than something that’s going to be constructed. That gap needs to decrease.”
While planning restrictions are often cited as barriers to new housing development, Conisbee pointed out that costs are a much greater obstacle, adding, “many developers would say it’s not okay, but of all the things, [planning is] the least of the problems. Planning does move pretty well at the moment.”
CrowdProperty provides fast, simple and transparent property project finance for property professionals, learn more.
Opinions or views expressed represent the thoughts of individuals and not those of CrowdProperty or Quay.