Property market expectations for 2025

It’s always fascinating to explore how property prices might move over the coming year.

While short-term price fluctuations aren’t particularly relevant for long-term investors, this kind of analysis can be incredibly useful for those planning to sell or buy property in 2025.

Last week, I joined James Kirby on The Australian’s finance podcast to dive into this topic, and I wanted to share some of the key points from our discussion.

What happened in 2024?

Across the 5 major capital cities, house prices rose 5.2%, on average, over the 2024 calendar year:

• Sydney rose 2.5%

• Melbourne fell 2.9%

• Perth rose 18.7%

• Adelaide rose 12.5%

• Brisbane rose 9.8%

It’s worth noting that Melbourne was the only market to record a decline in prices.

Anecdotally, I’m aware that in some parts of Victoria, particularly in coastal areas, there are far more potential sellers than buyers.

However, many sellers have chosen not to list their properties because they recognise that buyer demand is very weak.

The main reason prices in Victoria, including Melbourne, haven’t fallen further is that most owners aren’t under pressure to sell.

They’re content to sit tight and ride out this cycle rather than sell in a challenging market. If that situation doesn’t change in 2025, Melbourne’s prices won’t fall substantially.

Factors that will have the greatest influence in 2025

Last year, I highlighted interstate migration, loan volumes, and housing supply as the three most influential factors affecting property prices (see here).

Interstate migration 

Interstate migration serves as a strong indicator of property buyer sentiment.

The latest data (up to June 2024) reveals some notable trends:

• Sydney: Net interstate migration is deeply negative, with a net 7,700 people leaving per quarter over the past year – over 50% higher than the long-term average of 5,000 net departures per quarter.

• Victoria: The state has seen a turnaround, averaging a net inflow of 660 people per quarter over the 12 months to June 2024. This is a significant improvement from the long-term average of a 1,000-person net loss per quarter. And a remarkable recovery from the Covid period (2020–2023), when Victoria experienced an average net loss of 5,000 people per quarter.

• Queensland: Interstate migration remains strong, with 7,500 net people arriving per quarter, well above the long-term average of 6,000.

• South Australia: Net migration is negative but remains better than its long-term trend.

• Western Australia: After years of below-average migration, the state is now experiencing positive net inflows of approximately 2,500 people per quarter.

In summary, Sydney is becoming less popular, the narrative around Victoria has shifted positively, and Queensland continues to stand out as a highly popular destination.

Loan volumes

Loan volumes surged between 2020 and early 2022, driven by historically low interest rates that made borrowing far more affordable and attractive.

However, this trend reversed sharply from February 2022, particularly after the RBA began raising rates in May 2022.

Since March 2023, lending volumes have rebounded strongly and are now approaching the peaks seen in early 2022.

Unsurprisingly, investor loan volumes vary significantly across states compared to pre-COVID levels:

• Victoria: Loan volumes are slightly below pre-Covid levels.

• NSW: About 20% higher.

• South Australia: Approximately 50% higher.

• Queensland: Over 80% higher.

• Western Australia: A remarkable 235% higher, though this is from a very low base.

Looking ahead to 2025, affordability and borrowing capacity will continue to be key factors shaping the property market.

These dynamics are likely to sustain strong demand in more affordable markets like Queensland, Adelaide, and Perth.

Interestingly, some lenders have already begun quietly relaxing credit policies, such as offering longer loan terms and requiring less paperwork, to enhance borrowers’ capacity.

Given that the banking regulator has indicated it won’t reduce the 3% loan buffer, I anticipate more lenders will adjust their credit policies to support borrowing.

This should help underpin loan volumes.

However, tight borrowing capacity will remain a dominant theme, further driving demand in affordable markets throughout 2025.

Housing supply and the federal election

Housing affordability is set to be a key issue in this year’s federal election, as it often is.

Federal elections can impact property markets, particularly if a major political party proposes significant policy changes.

From what I understand, the ALP has ruled out any changes to capital gains tax (CGT) or negative gearing, providing some certainty for property investors.

On the other hand, the Coalition appears likely to introduce a policy allowing first-home buyers to access their superannuation to help purchase a home.

Policies like this can have a real influence on the property market, particularly in the short term, as they can affect buyer demand and sentiment.

Will interest rate cuts have a big impact?

It’s widely expected that the RBA will begin cutting interest rates in 2025, with most commentators predicting the first cut around mid-year.

Money markets have already priced in three 0.25% rate cuts for 2025.

Even if rates are reduced by 0.75% in total, we shouldn’t overestimate the impact on borrowing capacity.

• Also read:Melbourne property market forecast for 2025
• Also read:Brisbane’s property market forecast for 2025
• Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
• Also read:Sydney property market forecast for 2025
• Also read:You’ll never believe the most affordable regions to rent in Australia

For most people, borrowing capacity would only increase by about 5% to 10%.

However, the real impact of rate cuts will be felt by existing borrowers, particularly those carrying significant debt, as their repayments reduce.

There’s no doubt in my mind that lower interest rates will fuel demand for property and, in turn, drive price growth.

Expectations of future rate changes beyond 2025 could also influence the property market.

As it stands, money markets aren’t pricing in any additional cuts beyond the three expected next year.

However, if those expectations shift – whether toward more cuts or potential hikes – it could have a significant impact on property prices.

A medium-term outlook is more helpful

While it’s interesting to speculate on how property prices might change in 2025, I believe it’s far more valuable to focus on the medium-term outlook, say the next 3 to 7 years.

Short-term price movements are almost impossible to predict with high conviction.

However, the longer the time horizon, the more predictable market trends become.

This chart highlights that property markets typically move in two distinct cycles: a flat cycle followed by a growth cycle. I’ve studied every flat and growth cycle since 1980.

Growth cycles since 1980

The table below includes all growth cycles since 1980.

On average, these growth cycles last about 10 years (the shortest is 4 years and the longest is 20 years).

This data provides valuable context for evaluating whether current growth cycles are nearing their completion:

• Perth: The growth cycle began less than 2 years ago, with prices increasing by approximately 40% so far.

• Adelaide: The growth cycle started 5.5 years ago, with prices rising by over 70% during that period.

• Brisbane: Similarly, Brisbane’s growth cycle began 5.5 years ago, with prices also up by over 70%.

• Sydney: The growth cycle started less than 4 years ago, but prices have only increased by 26% over that time.

This analysis suggests that Perth’s growth cycle is still in its early stages and is likely to continue for several more years.

Adelaide and Brisbane appear to be beyond the halfway point of their cycles. Sydney, however, is harder to assess and remains less clear.

Flat cycles

The table below includes all flat cycles since 1980.

On average, these flat cycles last about 8-9 years (the shortest is 7 years and the longest is 12 years).

Melbourne’s flat cycle began 8 years ago, during which the median house price has declined by an average of 2.4% p.a. in real terms – that is, after adjusting for inflation.

This is substantially more than any previous flat cycles, except in Sydney between 1989 and 1996 where prices fell by 2.8% p.a. in real terms.

This analysis suggests that Melbourne is likely getting close to the end of its flat cycle.

What to expect in 2025?

I expect 2025 to bring more of the same.

The RBA is likely to remain cautious with interest rates and given the strength and resilience of the employment market, I think the likelihood of more than three rate cuts is slim.

While rate cuts will provide some stimulus to the property market, I don’t anticipate a significant impact, as mortgage volumes are already quite high.

I also don’t believe the federal election will disrupt the property market.

If there isn’t a material increase in forced property sales, and I don’t expect there will be, I think Melbourne’s prices will hold up relatively well.

My 2025 predictions:

• Perth: Once again, the strongest performer, with another year of double-digit growth.

• Brisbane and Adelaide: Both set for strong years, with high single-digit growth.

• Melbourne and Sydney: Likely to lag, with price movements ranging from -3% to +3%.

Slow markets can deliver better opportunities

In the long run, a high-quality, investment-grade property is likely to deliver strong returns, no matter which capital city it’s located in.

That said, it’s always smarter to invest with an eye on maximising both medium and long-term returns.

Right now, I believe Melbourne is the most attractive market.

It’s likely to enter a growth cycle within the next 1 to 4 years, and softer markets often provide excellent buying opportunities due to reduced competition from other buyers.