Market cooling in Sydney and Melbourne

House and apartment prices in Sydney and Melbourne are expected to continue to fall in 2025, while Perth is likely to see the biggest growth of all Australian state and territory capitals. Such a prediction was published by the SQM Research company, which deals with the analysis of the real estate market, in its latest report on price predictions.

The first scenario

According to this report, average house and apartment prices nationally will rise between one and four percent in the coming year.

This is the baseline scenario, which assumes a reduction in interest rates in mid-2025, with continued population growth of 500,000 or more annually, and no re-emergence of inflation.

In addition to these internal factors, the market can also be influenced by external circumstances, depending on whether the war in Ukraine will end and tensions in the Middle East will ease.

According to the first scenario, it is predicted that Perth will lead the market when it comes to the growth of real estate prices, while prices in Sydney and Melbourne will “cool down”, with a predicted drop in prices of as much as five percent.

SQM Research managing director Lewis Christopher expects strong population growth and the ongoing shortage of new housing is likely to continue into 2025.

– We expect a reduction in interest rates starting in the middle of 2025, which will continue the momentum of real estate price growth in Perth, Brisbane and Adelaide and keep the decline in prices in Sydney and Melbourne at a single-digit rate – pointed out Christopher.

Otherwise, the report presents four scenarios based on different government policies and global economic trends, predicting how this will affect the movement of house prices.

The impact of interest rates

Lewis Christopher predicts the Reserve Bank (RBA) will cut interest rates by 0.25 to 0.5 percentage points by mid-2025 as inflation moderates and the economy continues to grow below its expected trend.

If that happens, SQM predicts an immediate boost in consumer sentiment, which would stimulate demand and help stabilize falling prices in Sydney and Melbourne.

Economists from two of the four major banks, Westpac and NAB, expect the first rate cut by the RBA to happen in May, while the Commonwealth Bank and ANZ forecast rate cuts as early as February.

– Current interest rates have a greater impact on property prices in cities such as Sydney, Melbourne, Canberra and Hobart. If rates come down, these cities could see a quick recovery in buyer demand, especially given the underlying housing shortage relative to population growth, Christopher explained.

Lucy Ellis, chief economist at Westpac, expects the RBA to deliver more consecutive interest rate cuts between May and July.

From boom to bust

According to the remaining three scenarios of the SQM report for the national real estate market in 2025, prices range up to 20 percent growth in Perth, or up to a possible ten percent drop in Sydney.

The second scenario assumes that next year there will be no interest rate cuts at all, with continued strong population growth and unchanged inflation. This could lead to an even greater fall in house prices in Sydney, Melbourne, Hobart and Canberra, but also to growth in Perth, Brisbane, Adelaide and Darwin.

The combined average of the capital cities would range from minus three to plus one percent, according to the report.

In a third scenario, a rate cut before May would see house prices rise in every state, including rises of up to 20 per cent in Perth and 16 per cent in Brisbane.

Under the worst-case scenario, population growth would fall below 400,000 people, there would be no rate cut, and commodity prices would remain firm. This could lead to Sydney and Melbourne seeing a bigger drop in prices, up to ten percent, as “these two cities take the lion’s share of new long-term arrivals from abroad,” the report predicts.

Prices in Perth, Brisbane and Adelaide would continue to rise under this scenario, just more slowly compared to 2024.

Next year’s federal election is unlikely to affect prices in the short term, the report said, but an election campaign focused on housing and migration policies could affect housing conditions next year.

From a slight drop to an increase in prices

Head of research at CoreLogic agency, Eliza Owen believes that it is unlikely that buyer demand will increase until early 2025. According to her, property price growth in Perth and Brisbane has started to slow slightly and she expects it to continue to ease, as well as could Adelaide feel a loss of momentum.

On the other hand, economist Marcel Tilian from Kapital Economics believes that house prices will probably increase by five percent by December 2025 compared to the amounts from December 2024.