Australia’s housing market is “delicately poised”

James Thornhill
09:00am March 05 2025

Aerial view of suburban homes in Adelaide, South Australia. (Getty)

Australian house prices dipped through December and January, before ticking higher in February, to leave the market delicately poised between the prospect of more interest rate cuts and still-challenging affordability. 

Overall, Westpac economists see a “constrained” outlook for prices over 2025, forecasting around 3 per cent growth Australia-wide. They also expect to see a re-convergence in performance across the major capital city markets. 

“Housing-related sentiment has had a mixed three months. Buyer sentiment has continued to improve but price expectations are less bullish,” Westpac Senior Economist Matthew Hassan said in the bank’s latest Housing Pulse report. 
 

The economics team expects a further 75 basis points worth of rate cuts from the Reserve Bank by end-2025, adding to the 25-basis-point easing in February. The question is how will the market respond to these cuts?

On the one hand, housing is typically sensitive to moves in interest rates, “and the very early signs suggest we are already seeing a positive shift after the RBA’s February move,” Hassan says.

“However, markets are coming off a cycle that was surprisingly disconnected from interest rates,” he adds. 

The initial price upturn in 2023 came despite RBA rate hikes that helped drive mortgage rates to 15-year highs. 

“The evidence pointed to surging population growth as key to that ‘counter–cyclical’ dynamic,” Hassan says. Now interest rates are easing but population drivers are coming off as well.

Pent-up demand

A growing number of people are planning to get involved in the housing market in the next twelve months, according to a home ownership survey included in the report, in a potentially bullish signal for the market.  

The proportion of survey respondents planning to ‘pull the trigger’ over the next 12 months rose to about a third, up from a quarter with plans last year. 

“The responses show both a high degree of ‘pent–up’ demand – likely reflecting earlier plans that have been delayed – and an expectation that 2025 will provide a good opportunity to move on these,” Hassan says.

The increase was concentrated in those looking to buy a new home (up 2.3 per cent) or an investment property (up 3.3 per cent). 

In contrast, the number of prospective first-home buyers intending to enter the market showed only a modest 0.3 per cent increase, underlining the affordability challenge still facing many looking to get on the property ladder.

Supply issues linger

Tight supply has been a persistent issue for Australia’s housing markets in recent years, and while there are some “green shoots” of improvement, Hassan doesn’t see the supply landscape changing dramatically in the short term.

“While housing approvals are expected to see a sustained lift to just over 200,000 by the end of 2026, the flow through to dwellings under construction is more muted,” Hassan says. Part of that is due to the construction industry still clearing a hefty backlog of work. 

Many projects have been delayed or suspended after a surge in costs, on top of post-COVID supply chain disruptions, led to terms being renegotiated or, in some instances, the contractor going into bankruptcy.

Hassan sees dwelling completions holdings at around 171,000 in both 2025 and 2026 - a long way short of the 240,000 per year required to meet the Accord Target agreed by state and federal governments to deliver 1.2 million new homes over the five years to 2029.

Completions may pick up from 2027, making the original target of 1 million homes potentially reachable. 

Regional convergence

The mining states of Western Australia and Queensland have seen housing prices surge in recent years, leaving the eastern states of New South Wales and Victoria trailing in their wake. 

In both cases, the strength of the economy has combined with tight supply – particularly in the rental market – to send prices soaring. However, both markets are beginning to show signs of fatigue.

They look set for more modest price growth in 2025, in the region of 4 per cent, bringing them closer to the capital city pack.

Sluggish growth is also forecast for the key markets of Sydney (3 per cent) and Melbourne (1 per cent). 

In Sydney, the affordability challenge remains acute, leading to weak turnover and a drop in new listings. In Melbourne, the weakness of the Victorian economy is having an impact, while housing supply is also higher than elsewhere, keeping price growth constrained. 

To read the latest Housing Pulse report, visit WestpacIQ. 
 

James Thornhill

James Thornhill was appointed as editor of Westpac Wire in May 2022. Prior to joining the bank, he was a business and financial journalist with more than two decades of experience with international newswires. Most recently, he was a resources correspondent for Bloomberg, covering the mining and energy sectors, and previously reported on a broad range of topics from economics and politics to currency and bond markets. Originally from the UK, he’s had stints working in London, New York and Singapore, but is now happily settled in Sydney.

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