Affordability set to drive Melbourne recovery

Scott Kuru January 21, 2025 4 min read

Image from NCA NewsWire/Aaron Francis

KEY POINTS

ANZ Bank forecasts that capital city housing prices will grow by 2.7% in 2025, before accelerating to 4.1% next year
In the medium term, some of the strongest price growth is forecast for Melbourne, which is expected to see growth accelerate to 4.9% in 2026
The relative affordability of Melbourne property will be a key demand factor pushing up prices in the Victorian capital

ANZ Bank’s economics team has updated its housing price forecasts.

Australia’s third largest bank now says it expects capital city housing prices to grow by 2.7% in 2025, before lifting to 4.1% next year.

ANZ says that it expects to see “further cooling” in the residential property market, where growth slowed towards the end of 2024.

Monthly Change

“Housing price expectations are down, the median time properties are on the market has risen and auction clearance rates are sluggish,” say ANZ Bank economists Madeline Dunk and Catherine Birch.

In a briefing note, the economists highlight the cyclical nature of Australia’s property markets, indicating they expect the cities where price growth has slowed the most recently (Melbourne, Sydney, Canberra, Hobart and Darwin) to regain momentum in 2026.

They highlight Melbourne’s relative affordability compared to other capital city markets and believe that will lead to a turnaround in the southern city’s fortunes.

According to CoreLogic, Melbourne residential property values have increased just 8.4% over the last four and a half years, while long-time rival Sydney has grown by 27.7% and Perth by an astounding 77%.

However, the ANZ report also forecasts slowdowns in the boom markets of Perth, Brisbane and Adelaide.

2025 forecasts

ANZ Bank says it believes the current slump in housing price growth is likely to continue until the Reserve Bank of Australia begins cutting official interest rates from its 13-year high of 4.35%.

The bank’s economics team says it is expecting only two 0.25% cuts this year, in February and August 2025, taking the cash rate to 3.85%.

“We think the RBA will take a cautious approach in dialling down the restrictiveness of current policy settings, rather than February being the start of an aggressive easing cycle,” ANZ says.

“While this should support sentiment, particularly in cities like Sydney and Melbourne, it is unlikely to materially boost prices immediately.”

As a result, ANZ forecasts that dwelling prices in Sydney and Melbourne will end 2025 up just 0.7% and 0.1% respectively.

YoY table

“In Perth and Brisbane, where demand continues to outpace supply, price growth should remain robust in 2025,” say ANZ economists Madeline Dunk and Catherine Birch, while “affordability constraints are likely to restrict Adelaide price growth in 2025.”

2026 and the multi-speed market

ANZ’s Madeline Dunk and Catherine Birch say 2026 will “likely be dominated by two themes: affordability and supply.”

The economists say Australia’s long-term challenges with housing undersupply will place upward pressure on prices.

That will see a turnaround in the markets of Sydney, Melbourne, Hobart, Canberra and Darwin.

Dunk and Birch say Sydney’s expensive real estate may mean that the Harbour City “may underperform slightly” in the upturn, clocking up 3.7% growth in 2026.

However, the economists forecast the strongest capital city price growth in 2026 will be 4.9% in Melbourne, which they say “should benefit from an affordability-related demand boost.”

According to CoreLogic, Melbourne’s sluggish value growth has seen it slip several spots over the last year to become Australia’s sixth most expensive (or third cheapest) capital city with a median dwelling value of $774,093, with only Hobart and Darwin cheaper.

Over the long term, Melbourne’s median home price has usually been equivalent to about 78% of Sydney’s median price.

The Victorian capital’s lackluster price growth in recent years has seen that gap blow out to 65%.

To savvy investors who look at long-term trends, that means Melbourne property is currently about 13% under-valued.

Madeline Dunk and Catherine Birch believe a continuing lack of housing supply in the face of strong demand will continue to support home price growth in Brisbane and Perth, although the rate of that growth will continue to slow.

“Meanwhile, Adelaide, Hobart, Canberra and Darwin are expected to record subdued growth of 2.5% or less,” they say.

ANZ says RBA rate cuts could have a stronger than expected impact on demand than its economists have anticipated.

However, the bank says it is also possible that the expected shallow nature of the interest rate easing cycle “fails to shift the market out of its current slump.”