House prices in Sydney and Melbourne are forecast to fall next year as Perth leads the country in value growth

House prices in Sydney and Melbourne will continue to decline in 2025, with Perth likely to see the strongest growth among Australia’s capital cities, according to SQM Research’s latest Boom and Bust report.

The report projects national average home prices to rise 1 to 4 percent.

This is consistent with a base case scenario that assumes interest rates to fall mid-year, population growth to continue at 500,000+, and no return to inflation.

On a global scale, this means an end to the war in Ukraine and an easing of tensions in the Middle East.

Under this scenario, Perth is forecast to lead the market while property in Sydney and Melbourne cools and prices fall by as much as 5 per cent.

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

“We don’t expect major changes to current trends,” he said.

The report presents four scenarios based on different government policies and global economic trends to project rising and falling housing prices.

CoreLogic research director Elisa Owen said consumer demand was unlikely to pick up by early 2025.

“Melbourne, Hobart, Darwin and Canberra have all experienced declines in recent months that could continue in the short term, while Sydney could also be dragged into a mild downturn given affordability constraints and limited borrowing capacity in a high interest rate environment. “, she said.

“Growth in Perth and Brisbane has started to slow slightly and is expected to continue to slow, while Adelaide may also see some slowing in pace.”

But that could change in the second half of 2025 if household finances improve, supporting a surge in demand.

“Especially in Hobart and Melbourne where prices have dropped significantly,” Ms Owen said.

Economist Marcel Thiliant of Capital Economics said house prices are likely to rise 5 percent by December 2025, compared with December 2024 levels.

“Our leading house price index continues to point to sustained price gains in the coming months and we should get some support from rate cuts,” he said.

But with availability “the strongest since the early 1990s,” any price increases are likely to be modest, he said.

Impact of Interest Rates

Mr Christopher expects the Reserve Bank to cut interest rates by 0.25 to 0.5 percentage points by mid-2025 as inflation falls and economic growth continues to lag behind trend.

If this happens, SQM expects an immediate boost in consumer sentiment, which will stimulate consumer demand and help stabilize falling prices in Sydney and Melbourne.

Economists at two of the four biggest banks – Westpac and NAB – expect the RBA’s first rate cut to come in May, while the Commonwealth Bank and ANZ are forecasting rate cuts in February.

“If rate cuts occur, these cities could see a rapid rebound in buyer demand, especially given the underlying housing shortage relative to population growth.”

Lucy Ellis, Westpac’s chief economist, now expects the RBA to “start” its rate-cutting cycle with successive cuts in late May and early July.

“As always, our view on interest rates is based on the fact that overall events are developing as we expect, which may differ from the RBA’s own view.”

Ms Ellis pointed to minutes from the RBA’s last meeting which showed the board wanted to see “more than one good quarterly inflation result” to be confident that the fall in inflation was sustainable.

“That’s almost certainly how the board and staff think about the future,” she said.

“This suggests that they will wait longer than we previously thought.

“However, we recognize that the situation can change quite quickly and that the RBA’s view of the economy appears to be slightly more hawkish than we think is warranted.”

Price forecasts from boom to bust

The SQM report’s other three scenarios for the national housing market in 2025 range from a 20 per cent rise in Perth to a 10 per cent decline in Sydney.

The second scenario assumes no rate cuts next year, continued strong population growth and persistent inflation.

This could see house prices fall further in Sydney, Melbourne, Hobart and Canberra, but rise in Perth, Brisbane, Adelaide and Darwin.

The report says the capital average will range from -3 to +1 percent.

In another scenario, rate cuts earlier than May would see house prices rise in every state, including up to 20 per cent in Perth and 16 per cent in Brisbane.

In the worst case, population growth falls below 400,000, there are no rate cuts, and commodity prices remain stable.

This could see Sydney and Melbourne see steeper price falls of up to 10 per cent as “the two cities account for the lion’s share of new long-term overseas arrivals”, the report predicts.

Under this scenario, prices in Perth, Brisbane and Adelaide would still rise, but at a slower rate compared to 2024.

The report says next year’s federal elections are also unlikely to affect prices in the short term, but an election campaign focused on housing and immigration policies could impact housing conditions next year.