Key Economic Changes in 2025 and Their Impact on Australia’s Housing Market

As we venture into 2025, the Australian housing market faces significant changes influenced by evolving economic factors. CoreLogic’s Head of Research, Eliza Owen, outlines how easing pandemic-driven trends like high inflation and overseas migration, along with shifting interest rates and unemployment, are set to shape the year ahead. Here’s a breakdown of what these changes mean for property buyers, sellers, and renters in the Australian real estate market.

Interest Rates: Lower, but with Limited Impact on Housing Activity

Interest rates are tipped to drop in early 2025, with annual core inflation falling to 3.2% in November 2024—lower than the RBA’s forecast of 3.4%. Some major banks predict a February rate cut, potentially signalling relief for borrowers in the Australian property market. However, any reductions may have a muted effect on home values and transaction activity.

Even if mortgage rates decrease significantly, housing affordability remains a challenge. A median-income household might afford a $593,000 home, which is still far below the current median home value of $815,000. Furthermore, a projected cash rate of 3.1% by year-end remains higher than the pre-COVID average of 2.55%, meaning borrowing conditions will remain tighter compared to the 2010s.

While changes to Stage 3 tax cuts in 2024 increased borrowing capacity for some, they didn’t translate into significant market growth, signalling that other economic pressures continue to weigh on consumer behaviour in the Australian housing market.

Lending Policies: The Balancing Act

Regulators like APRA may play a key role in amplifying or counteracting the effects of rate cuts. A reduction in the mortgage serviceability buffer—from 3.0 percentage points to 2.5 percentage points—could enhance borrowing capacity and stimulate home-buying activity. However, this outcome is far from certain.

APRA’s cautious stance on financial risk, particularly concerning high household debt levels, might see it impose stricter lending rules. Measures like limiting high loan-to-value ratio (LVR) or high debt-to-income (DTI) loans, similar to policies in New Zealand, could offset the benefits of reduced interest rates for buyers navigating the Australian real estate market.

Unemployment: Rising, but with Limited Market Impact

The unemployment rate is forecast to rise to 4.5% by late 2025. While this may initially seem concerning, history suggests rising unemployment often coincides with lower interest rates, which can offset negative effects on housing values.

Additionally, the tight labour market and falling inflation will likely boost real incomes for those who remain employed, improving their ability to save for deposits or cover transaction costs. That said, unemployment tends to disproportionately affect younger Australians, who are more likely to be renters. This dynamic could reduce rental demand in some areas, creating variability in rental market trends in Australia.

Overseas Migration: Slowing, Easing Rental Market Pressures

Net overseas migration peaked at 556,000 in September 2023 but dropped to 446,000 by June 2024. By mid-2025, it’s expected to further decline to around 340,000 as the ‘COVID catch-up’ effect fades.

High migration levels during 2022 drove up rental demand, especially in regions heavily reliant on overseas arrivals. As migration slows, these same areas are experiencing reduced pressure on rents, offering some relief for renters who faced significant price hikes in recent years. However, this trend may not be uniform, with localised markets continuing to experience fluctuations based on regional dynamics.

Residential Construction: A Sector in Transition

The residential construction sector faces ongoing challenges. New dwelling approvals have dropped by 24% compared to the decade average, with only 169,000 homes approved by November 2024. High construction costs, elevated interest rates, and cautious buyer sentiment have dampened activity in the Australian property market.

Encouragingly, signs of recovery are emerging in certain regions, particularly in Western Australia, South Australia, and Queensland, where dwelling approvals showed improvement in early 2024. Moreover, a backlog of approximately 250,000 incomplete dwellings provides some buffer to housing supply shortages as capacity constraints begin to ease.

Nevertheless, the sector continues to compete for labour and materials with public infrastructure projects, underscoring the need for ongoing government and business support to boost productivity and ensure timely delivery of new homes in Australia.

What Does This Mean for the Housing Market in 2025?

Despite lower interest rates and easing inflation, the Australian housing market is expected to remain subdued compared to recent years. A slight downturn in values is anticipated early in the year, followed by a modest recovery as economic conditions stabilise. Key trends to watch include:

• Interest Rates and Lending Policy: While rate cuts may offer some relief, regulatory measures could limit their impact on home values.
• Labour Market Dynamics: Rising unemployment may dampen demand in rental markets but could boost affordability for employed buyers.
• Migration Trends: Slowing overseas migration will ease pressure on rental markets, but regional variations will persist.
• Construction Activity: While new approvals remain low, stabilising costs and easing capacity constraints may improve supply over time.

For buyers, sellers, and investors, understanding these shifts will be critical in navigating the Australian property market in 2025. Whether you’re planning to purchase your first home, sell a property, or manage rental investments, staying informed will help you make confident, strategic decisions in this changing environment.

Source:  Corelogic RPData