Home prices set for major boost next year

Scott Kuru April 9, 2024 5 min read

KEY POINTS

Oxford Economics Australia says the pace of home price growth in Australia’s capital cities will pick up strongly in 2025
The forecaster is predicting that growth will be sustained in both unit and house markets in most cities through to at least mid-2027
However, Oxford predicts rental growth - which has soared over the past 18 months - will slow
The forecaster believes Perth will continue to be Australia’s stand-out capital for home price growth, while Sydney may have reached “peak unaffordability”

Australian residential property prices - already growing strongly this year - are set for a major price boost in 2025 and beyond, according to new research from a major forecaster.

Oxford Economics Australia believes that an ongoing housing shortage, combined with expected interest rate cuts beginning later this year, means price growth will begin to accelerate in 2025, and that momentum will continue through to at least mid-2027.

In some positive news for tenants, the forecaster also believes that the pace of rental growth will slow, with the market’s capacity to absorb higher rents “topping out”.

Oxford’s Residential Property Prospects report predicts Perth will continue to be Australia’s standout property price performer through to 2027, while Sydney might have reached “peak unaffordability”.

The details

Oxford Economics Australia says capital city house prices ended 2023 up 7.6%, while units gained 5.7%.

Senior Economist and report author, Maree Kilroy, says those are “impressive returns” when you put them against the backdrop of increasing mortgage interest rates, as the Reserve Bank of Australia attempted to stop the economy from overheating.

“While we expect national price momentum to slow in the second half of this year,” she says, “it will accelerate again in 2025, with units set to outperform houses over the forecast period.”

Oxford Economics Australia now expects combined capital city median house prices to clock up another 4.7% growth in 2024, with units performing more strongly at 5.1%.

That price growth will then accelerate, with units set to outperform houses over the three years to 2026-27, with predictions of 6.7% average annual growth for units versus 6.2% for capital city houses.

Sydney

While auction clearance rates show demand is holding up in Sydney, Maree Kilroy says she expects “this support to fade in the back half of the year given the extreme deterioration in housing affordability.”

In fact, she believes Sydney may have reached “peak unaffordability”, with 56% of a median gross household income needed to service a typical 30-year mortgage in the harbour city.

Nationally, this figure stands at 46%, although with predicted interest cuts and higher wages, Oxford believes this will ease to around 40% by June 2027.

Given the current difficulty of getting loans for house purchases in Sydney, the relatively cheaper price point of units will help back stronger growth in that sector.

Over the three years to June 2027, the forecaster is predicting 22% cumulative price growth in Sydney units, while house prices will grow more slowly at 18%.

Oxford says Sydney house prices will end this year 4.7% higher.

Melbourne

Melbourne will see more muted growth in 2024, with 2% price gains.

However, Oxford Economics Australia is predicting “a firm recovery” in 2025, “with key support coming from the resurgence in migration inflows, which will boost housing demand.”

That will see the median house price in the Victorian capital increase by 6.5% per annum through to June 2027 (a cumulative 19.5% gain), while unit prices are forecast to increase by 18.6% over the same period.

Brisbane

Oxford Economics Australia believes unit price growth will be particularly strong in Brisbane, averaging 7.1% per annum through June 2027, as compared to 5.9% for houses.

“Adding to this, the 2032 Olympics should provide a sustained boost to developer and buyer optimism from mid-decade,” Maree Kilroy says.

Adelaide

While the Adelaide market has grown strongly over the last few years, Oxford Economics Australia believes the pace of price gains in the South Australian capital may slow.

“A multi-decade high in-house completions will also act as a drag,” Maree Kilroy says.

She’s predicting 5.2% price growth this year for all dwellings before interest rate cuts spur a further acceleration.

Over the three years to June 2027, she believes Adelaide prices will grow a cumulative 16%, seeing the all-dwelling median price hit $881,000.

Perth

Perth, which recorded 14.2% house price growth last year, will continue to remain Australia's top performing capital city, according to Maree Kilroy.

“The Perth boom looks firmly entrenched,” she says, “with a forecast upturn in resource investment and government capex, the state economic outlook is bright.”

Oxford says the median house price will lift another 12.9% this year, while both houses and units are set to soar by 9% per annum over the three years to June 2027.

Other capitals

Maree Kilroy is predicting strong growth of around 6% a year for both houses and units in Canberra through June 2027, with lower growth of around 4.4% a year for Hobart dwellings.

She predicts that government spending, particularly in defence, will continue to drive employment growth in Darwin, with houses growing by 7.4% and units by 8% per annum over the three years to June 2027.

Rental prices

In some positive news for tenants, Oxford’s Residential Property Prospects report predicts price growth in the overheated national rental market will slow in the three years to 2027.

Even though it will take some time for vacancy rates to fall back to more normal levels, Maree Kilroy believes “stress on household budgets has reached a level that will significantly limit the capacity for further rental gains.”

She believes “the return of interest rate cuts from late 2024 will ease leveraged property outgoings” for landlords.

“On balance,” she says, “we expect this to pass through to more modest rent increases at lease renewal.”

Oxford Australia Economics is predicting rental growth to slow markedly to an average of 3.2% and 3.6% per annum for houses and units respectively in the capital cities over the three years to June 2027.