Australian home prices are set to keep falling in the first half of this year, according to a wide range of analysts, but they also expect the decline to be small and short-lived.
Data from both CoreLogic and PropTrack using two different methodologies both showed Australian home values posted their first monthly decline in around two years in December.
CoreLogic’s hedonic index pointed to a 0.1 per cent decline, while PropTrack’s index showed a 0.17 per cent fall.
CoreLogic’s head of research Australia, Eliza Owen, expects such moderate falls to continue for several months.
“A cyclical downswing is likely for early 2025 but it may not be large,” she wrote.
For context, Ms Owen pointed out that the largest national decline recorded in the index was 7.7 per cent between October 1982 and March 1983.
Other regular property market observers agree that prices are likely to keep falling for the first half of this year.
“There are numerous signs of softening in the Australian property market,” wrote AMP’s chief economist Shane Oliver, before listing them:
- Auction clearance rates have cooled from their highs, particularly in Sydney where the clearance rate has fallen to just above 50 per cent;
- new listings are up in most cities suggesting rising distressed listings as high mortgage rates bite;
- unit prices and lower quartile prices are now leading growth in most cities as affordability and borrowing constraints are pushing buyers into lower priced property;
- properties are staying on the market for longer; and sales activity is down.
Westpac senior economist Matthew Hassan says the bank’s analysis of so-called bellwether local markets, which often lead broader price moves elsewhere, indicates further weakness ahead, led by Melbourne and Sydney.
“With turnover also pulling back and listings starting to rise, the market looks susceptible to more price softness in early 2025,” he wrote.
What’s driving the house price decline?
PropTrack senior economist Anne Flaherty noted that an increase in sellers was a key factor driving the falls.
“Contributing to the slowdown — and reversal — of price growth, the number of properties for sale has been relatively high over the second half of 2024, particularly compared to the same period in 2023,” she observed.
“This has given buyers more choice and we’re seeing them take more time when purchasing.”
CoreLogic’s data shows total listings on the market at the end of 2024 were 5 per cent higher than a year earlier, while the average time a property took to sell went up from 28 to 33 days.
Ms Owen argues that affordability is another key factor pulling property prices down in many areas, especially expensive markets like Sydney.
“Housing demand has slowed amid a growing gap between income, borrowing capacity, and home values, exacerbated by slowing economic growth and higher-for-longer interest rates,” she wrote.
Ms Owen noted that the borrowing capacity of a typical household — even one which has access to a 20 per cent deposit — has fallen more than $300,000 below the median home price.
CoreLogic’s analysis shows the gap between how much prospective buyers can afford to borrow and the median home value has widened dramatically as interest rates have risen. (Supplied: CoreLogic)
Eventually, she argued, this gap has to close.
“For nearly two years, this gap may have been sustained by buyers less affected by interest rates, such as those using resale profits or higher-income buyers,” she theorised.
“Some buyers may have been willing to accept higher housing costs in the short term, on the expectation that interest rates would fall.
“However, as lower interest rates have not materialised, housing demand from these buyers may also be waning.”
Ms Flaherty also points to the delay in rate cuts, previously expected to start in 2024, as a key factor in the price falls.
“While the impact of stage 3 tax cuts, which took effect in July, bolstered borrowing capacities for some buyers, this has been counteracted by softer economic conditions,” she noted.
“In particular, interest rate cuts that were originally anticipated prior to 2025 have now been pushed back.”
What’s expected over 2025 and beyond?
There is a strong consensus amongst most analysts that further property price falls are likely to be moderate and concentrated in the first half of the year.
Shane Oliver points out that strong population growth and weak new housing supply have both contributed to the recent home price boom that is only now tailing off.
“The chronic housing shortage got the upper hand over high interest rates in 2023 as immigration levels surged and buyers feared that they would miss out,” he observed.
He argues that the sheer cost of housing has now got the upper hand, with too many prospective buyers simply unable to afford current asking prices.
However, he also believes that an underlying shortage of homes — which he estimates is at least 200,000 dwellings — will put a floor under price falls, and see modest price rises resume once interest rates start falling.
“After rising 4.9 per cent in 2024, we expect average property prices to rise around 3 per cent 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 forecast.
Westpac’s Matthew Hassan broadly agrees with that forecast for 2025.
“After a mixed first half we expect a second half gain to see dwelling prices up 3 per cent in 2025 with growth lifting to 7 per cent in 2026 — firmer but still constrained by affordability in most markets,” he concluded.
Dr Oliver also believes that house price increases are likely to be weaker due to the current poor affordability and the likelihood that mortgage rates will remain much higher than pre-COVID levels, with estimates of the neutral cash rate only about one percentage point below current RBA rates.
Likewise, Ms Owen believes any falls are likely to be small and quickly recovered once interest rates decline.
“Growth in real incomes may support more buyer demand as inflation moderates, and a reduction in interest rates would boost borrowing capacity,” she wrote.
“Underlying these economic factors is also a fundamental shortage of homes relative to the population, and the squeeze on the delivery of new housing amid weak capacity in the construction sector.”
However, Dr Oliver sounded a word of caution that risks to Australia’s property market remain skewed to the downside, given how expensive prices already are.
“Further delays in rate cuts, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a much sharper fall in property prices reflecting the divergence between home buyers’ capacity to pay and current home price levels.”
The December jobs numbers come out next week, with monthly inflation figures out later this morning and the key quarterly Consumer Price Index number out near the end of January.
The Reserve Bank will hold its first board meeting of the year on February 17-18, with markets currently pricing a slightly greater than 50 per cent chance of an interest rate cut.
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