Housing: The year that was and what to expect from 2025

The following wire is authored by Tim Lawless, Head of Research at CoreLogic Asia Pacific

The past year saw the housing sector move through a key milestone, with the value of the asset class surpassing the $11 trillion mark in August (up from $6.97 trillion five years ago). We also saw housing values continue to move through a sustained growth cycle, clocking up 22 months of consecutive gains by the end of November. This has taken values 14.5% higher since the growth cycle commenced in February 2023, and 5.9% above the previous peak in April 2022.

Although the macro trend saw values consistently rising through most of 2023 and 2024, the trends have evolved with the speed of growth losing momentum and conditions becoming more diverse across the capital cities and regions.

At one end of the spectrum, we have the mid-sized capitals of Perth, Adelaide and Brisbane delivering double-digit growth through the 12 months to November, with values up 21.0%, 14.0% and 12.1% respectively. At the other end is Melbourne, where values fell -2.3% over the same period, along with Hobart (-1.0%) and Canberra (-0.1%), where values also slipped lower over the year.

The nation’s largest and most expensive capital city, Sydney, moved into the early stages of a downturn late in 2024, with monthly value changes edging into the negatives in October and November but still 3.3% higher over the 12 months ending November.

Regional markets have also shown diverse conditions with growth led by areas in Queensland and Western Australia, including Queensland’s Gladstone, Townsville and Mackay and WA’s Mid-West and Bunbury regions, each recording 20%+ annual gains. The weakest regional markets are concentrated in Victoria, where values were down -2.8% over the 12 months ending November.

The easing in growth conditions has been accompanied by a rise in advertised stock levels. Capital city listings were tracking 4% higher than a year ago at the end of November, with the flow of new listings held above the five-year average through most of the year. The weakest cities have seen the largest rise in listings, with Melbourne stock levels tracking 9% above the previous five-year average, Sydney up 10% and Hobart listings 22% above average levels. 

The rise in available supply is good news for buyers, but it means selling conditions have deteriorated through the spring and early summer selling season, with auction clearance rates holding firmly below the 60% mark since late October.

Rental markets have also eased, albeit from extremely tight conditions. After moving through a record low of 1.4% a year ago, rental vacancy rates rose to 1.8% nationally by November. Although the vacancy rate is trending higher, it is still well below the pre-pandemic five-year average of 3.3%.

Annual rental growth has also eased back to 5.3% over the 12 months to November, down from 8.1% annual growth a year earlier and more than 9% annual rental growth in 2021 and 2022. A few capital cities, including Melbourne and Canberra, recorded a decline in rents over the three months ending November, with other major capitals like Sydney and Brisbane seeing a levelling out in rental growth, a stark turnaround relative to the past few years.

The outlook for housing markets has arguably deteriorated towards the end of 2024, with core inflation holding high, labour markets remaining tight, and the chances of a rate cut early this year becoming less likely, not to mention rising geopolitical risks and domestic affordability constraints.

A year of two halves? Until interest rates come down, it’s hard to see the weakening housing trend turning around. There is a good chance the rate-cutting cycle won’t commence until mid-this year. A lower cash rate will be a positive factor for housing markets, with lower mortgage rates providing a lift to borrowing capacity, and, along with lower inflation, strengthening serviceability assessments and supporting a further rise in consumer sentiment.

A couple of rate cuts might be enough to shore up a declining trend in home values, but it’s hard to see any material upward momentum returning to home values until interest rates reduce more substantially and affordability barriers are less formidable.

Alongside the uncertain economic outlook, housing markets are likely to be arriving in 2025 on a relatively weak footing, with value growth losing steam or falling, advertised stock levels rising, unaffordability at record highs and signs that demand is no longer keeping pace with the flow of new listings.

Rising levels of geopolitical risk add to the uncertainty of the 2025 outlook, with wars in the Middle East and Ukraine, and the implications of a new Trump presidency yet to become clear. Additionally, a federal election is around the corner, which is likely to feature housing policies front and centre, adding to the complexity.

An undersupply of newly built housing is likely to provide some support for housing values. Although population growth is expected to ease further in 2025, the record levels of population growth seen since international borders re-opened has resulted in a cumulative undersupply of housing across Australia.

The residential construction sector continues to face feasibility hurdles in getting new housing stock to market, with material and labour costs surging over the past five years.

While construction costs aren’t rising as rapidly as they were through the pandemic, they are still rising at around 1% a quarter. Significant competition from major public sector infrastructure projects is likely to keep prices for labour and materials high across the residential construction sector.

The best-performing markets?

The areas that are likely to outperform in 2025 are those where demand is set to remain strong and supply levels tight. 

Although the rate of value growth is easing, Perth and Brisbane stand out for their stronger underlying fundamentals of high population growth, including above-average rates of interstate migration, low housing supply and generally strong economic conditions.

Melbourne is also worth considering, given the renewed affordability advantage that has become apparent over the past few years. Melbourne is the only major capital where affordability is improving, and gross rental yields are rising. While Melbourne isn’t likely to win the growth stakes in 2025, buying with a medium to long-term objective in mind could be a good strategy amid the city’s strong buying conditions.