Housing Market Alert: Capital Cities Lead Price Decline as Rate Cut Looms

Current State of Australian Property Market

National House Price Declines

January 2025 marked the second consecutive month of decline in Australia’s national house prices, with an overall dip of 0.08%.

This comes after a similar fall in December 2024, ending a run of almost two years of continuous growth since February 2024.

The housing market’s recent downturn is concentrated primarily in capital cities, where prices have decreased by 0.16%, compared to a slight growth of 0.12% in regional areas.

Despite these recent drops, it’s essential to note that national house prices are still 45% higher than they were in March 2020.

The Role of Capital Cities

The decline in house prices is mainly driven by the performance of capital cities.

Hobart, Melbourne, and Sydney experienced the most significant falls, with declines of 0.46%, 0.30%, and 0.23%, respectively.

These reductions are impactful, especially in the context of these cities’ previously resilient market conditions.

Interestingly, Brisbane stood out as the only capital city to record a price increase, albeit a modest one of 0.08%.

It is a testament to the city’s ongoing demand and longer-term growth potential.

Melbourne was one of the areas

Regional Markets Show Resilience

While the capital cities faced declines, regional areas managed to grow, albeit slightly, by 0.12%.

This growth in regional regions reflects a continued demand for housing outside major urban centers, likely driven by affordability and lifestyle changes that have become more pronounced in recent years.

Broader Economic Impacts

The softer end to 2024 and the continued slide into 2025 can be attributed to several factors.

Increased housing stock has provided buyers with more choices, reducing the urgency to purchase.

Affordability constraints, higher interest rates, and weaker economic conditions have collectively dampened market activity, contributing to a slower growth pace and some price reversals.

Yet, there is optimism on the horizon.

Many of Australia’s major banks are predicting a cut in interest rates in February, spurred by lower-than-expected inflation figures.

If these rate cuts occur, they could enhance borrowing capacity and boost buyer confidence, potentially driving renewed demand and moderate price growth.

This current state of the market and the expected easing of rates indicate that while immediate affordability issues remain, there is potential for a balanced and modest recovery in the near term.

City-by-City Market Performance

Declines in Major Cities

The Australian property market has seen notable variations in the performance of its capital cities.

Hobart, Melbourne, and Sydney have experienced the most significant price drops in January 2025, reflecting a broader trend of slowing growth in these urban centers.

Prices in Hobart fell by 0.46%, the steepest decline among the capitals.

Melbourne and Sydney followed with decreases of 0.30% and 0.23% respectively.

While the declines in these major cities might seem substantial, it is essential to consider the broader context.

These urban areas had previously experienced robust growth, with prices still significantly higher than their pre-pandemic levels in March 2020.

The current price adjustments can be seen as a market correction, reflecting a shift in buyer preferences and economic conditions.

Brisbane’s Resilience

Amid the declines in other capitals, Brisbane stands out with a modest price increase of 0.08%.

This growth highlights Brisbane’s relative resilience and ongoing demand, possibly driven by its affordability compared to Sydney and Melbourne.

The city’s market performance suggests a steady interest from buyers, leveraging its reputation for offering a balanced lifestyle and economic opportunities.

Long-Term Performers: Perth, Adelaide, and Brisbane

Looking at the longer-term trend, Perth, Adelaide, and Brisbane have emerged as the top-performing capital cities.

Over the past year, these cities have recorded double-digit growth.

Perth leads with a remarkable annual increase of 15.38%, followed by Adelaide at 12.41% and Brisbane at 10.44%.

These figures reflect consistent demand and robust market conditions, which could be attributed to various factors including local economic stability, population growth, and relatively lower price points compared to the eastern seaboard.

Transition to Regional Markets

As capital cities exhibit varying trends in property prices, regional markets present a disparate but complementary picture.

This shift towards regions reflects changing buyer preferences and opens new opportunities for growth away from traditional urban centers.

Factors Behind the Current Market Slowdown

The Australian property market has recently experienced a slowdown, with national house prices declining for two consecutive months as of January 2025.

Several factors contribute to this deceleration, which are explored below.

Increased Housing Stock and Buyer Choices

One of the primary reasons behind the market’s slowdown is the increased housing stock available for buyers.

The surge in the number of properties for sale has provided buyers with more options, lessening the urgency to make quick purchasing decisions.

This rise in inventory has contributed to a more balanced market, where buyers have the upper hand.

According to REA Group senior economist Eleanor Creagh, the additional stock has allowed buyers to take their time and evaluate their options, reducing the immediate pressure to transact.

Affordability Constraints and Higher Interest Rates

Affordability has remained a persistent challenge for many prospective homebuyers.

The combination of high property prices and increased interest rates has placed significant financial strain on individuals and families looking to enter the market or upgrade their homes.

Higher interest rates, in particular, have made borrowing more expensive, limiting potential buyers’ purchasing power.

This has led to a dampening effect on overall market activity, as fewer people can afford to buy properties at current prices.

Weaker Economic Conditions

The broader economic landscape also plays a crucial role in the property market’s performance.

Weaker economic conditions, including slower economic growth and uncertainty about future financial stability, have contributed to the reduction in housing demand.

Economic challenges can lead to job insecurity, reduced consumer spending, and lowered confidence in making substantial financial commitments, such as purchasing a home.

Impact on Price Growth

These factors combined have not only slowed down the rate of price growth but, in some instances, led to price reversals.

The reduced urgency to buy, coupled with affordability issues and economic uncertainties, has softened the upward trajectory of house prices that was previously observed.

While the decline in prices is currently modest, the cumulative effect of these contributing elements cannot be overlooked.

Transition

As the market navigates these challenges, attention is now turning to potential catalysts for recovery.

The likelihood of interest rate cuts in February 2025, driven by lower-than-expected inflation figures, may offer a glimmer of hope for buyers and investors alike.

With major banks predicting a reduction in rates, there is an expectation that borrowing capacity will improve, potentially invigorating the market and prompting a resurgence in demand and price growth.

Expected Market Recovery

Rate Cuts on the Horizon

The potential for an interest rate cut in February 2025 is generating buzz in the Australian property market.

All major Australian banks believe that the Reserve Bank of Australia is poised to lower the cash rate by 25 basis points during its upcoming meeting.

The expectation follows the trimmed mean inflation rate coming in at 3.2%, which is lower than the RBA’s anticipated 3.4%.

This development has set the stage for a likely downward revision to the inflation profile in the February statement on monetary policy.

Boost to Borrowing Capacity and Buyer Confidence

A reduction in interest rates is expected to significantly boost borrowing capacity.

Lower rates make mortgages more affordable, enabling buyers to qualify for higher loan amounts.

This increase in purchasing power could stimulate demand in the housing market, as prospective homeowners find it easier to finance their property purchases.

With enhanced affordability, buyer confidence is also likely to improve, encouraging those who may have been hesitant to enter the market during periods of higher interest rates.

Anticipated Renewed Demand

Economists suggest that lower interest rates will drive renewed demand and potentially lead to price growth in the property market.

Although the extent of this growth may not mirror the sharp rises seen in previous cycles, the increased activity is expected to mark a recovery phase.

As borrowing conditions become more favorable, more buyers will likely re-enter the market, seeking properties and pushing up prices.

Evened-out Growth Compared to Previous Cycles

However, experts caution against expecting runaway house prices similar to past periods of rate easing.

The starting point for affordability remains stretched, meaning that while prices may increase, the growth will likely be more moderate.

Persistent affordability issues will temper the housing market’s recovery, resulting in a steadier pace compared to earlier cycles of interest rate cuts.

Given these dynamics, the anticipated interest rate cuts may signal a shift in market trends, influencing buyer behaviour and property investment strategies in the foreseeable future.