Melbourne and Brisbane to lead property recovery

Scott Kuru January 30, 2025 4 min read

KEY POINTS

Commonwealth Bank is forecasting that home price growth in Australia’s capital cities will ease slightly in 2025, before picking up in 2026
The Big 4 bank says expected cuts in interest rates by the Reserve Bank of Australia this year will boost prices, feeding through to stronger growth in 2026
CBA says Melbourne and Brisbane will be the strongest capital city property markets in 2026, with home price growth of 8% and 9% respectively

Australia’s largest bank and biggest home mortgage lender has updated its economic forecasts.

Commonwealth Bank is predicting modest home price growth in Australia’s capital cities in 2025, before the full impact of interest rate cuts sees growth take off again in 2026, led by Melbourne and Brisbane.

The details

Commonwealth Bank Senior Economist, Belinda Allen, says 2024 “was a divergent year in terms of capital city growth and the pace of growth through the year.”

While home prices across Australia’s 8 capital cities finished the year 4.5% higher, she points out that it was a year of two halves, with the first six months of the year seeing growth of 4.1%, compared to just 0.4% in the second half.

“Growing affordability challenges, cost of living pressures and a rise in listings slowed growth in home prices through all capital cities,” she says, with Melbourne and Sydney recording the softest outcomes of the major capitals.

She points to lower sales volumes as buyers pulled back, listings rose and auction clearance rates drifted lower, leading to a fall in prices in the last three months of the year.

Ms Allen and the team at CBA Economics also believe 2025 will be a year of two distinct halves.

“As we head into 2025, we expect a similar trend and anticipate home prices across the 8 capital cities to shift lower till around mid-year,” she says.

“Lower interest rates should then provide a boost to the market and see home prices rise across the back half of the year.

“Overall, we expect home prices to record a gain of 4% over 2025.”

Again, CBA is predicting a divergence in price performance between capital cities over the course of 2025.

Belinda Allen says the bank expects prices may fall in Sydney and Melbourne in the first half of 2025 “before a stronger rally over the second half of the year due to interest rate cuts.

“These markets (Sydney and Melbourne) are generally more sensitive to the interest rate cycle due to higher household indebtedness.

“Overall, we expect Sydney prices to rise by 2% this year, and the same in Melbourne.”

CBA says it expects Brisbane, Perth and Adelaide to experience slower monthly growth through the first half of 2025, ahead of interest rate cuts.

Senior Economist Belinda Allen points out that with below-average listings, and with Perth and Brisbane still attracting net interstate migration, these cities should see solid price growth of 8% and 6% respectively in 2025.

Looking further ahead, Ms Allen says CBA has pencilled “in a 7% lift for (Australian capital city) home prices in 2026.”

She says price growth will be “firmer as the lagged impact of interest rate cuts supports the market.”

With growth slowing in the booming markets of Perth and Adelaide, CBA sees a shift back to the eastern seaboard, with Melbourne and Brisbane leading price growth with 8% and 9% respectively and Sydney accelerating to 6% after a lackluster 2025.

The price predictions are based on CBA’s Home Price Model.

When compared to past data compiled by CoreLogic, the model has proved to be extremely accurate.

CBA also maintains a “base case” that there will be at least four interest rate cuts of 0.25% totalling 100 basis points by the Reserve Bank of Australia this year, starting next month.

That would take the cash rate (which has been at 4.35% since November 2023) down to 3.35%, suggesting retail variable mortgage rates could end the year in the vicinity of 5-6%.

CBA’s Head of Australian Economics, Gareth Aird, says the main risks to that scenario are continuing tightness in the labour market; the recent weakness in the AUD, which he says “points to some modest upside risk to our inflation forecasts”; and government spending, which he admits could be significant in a Federal election year.

As for the ongoing housing shortage in the face of strong population growth, CBA is not predicting much relief.

Belinda Allen says, “The imbalance between underlying demand, driven by population growth, and constrained supply, is set to continue in 2025.”

However, she notes that Australia’s population is set to grow at a slower pace - by 415,000 or around 1.6%/yr - than 2024, where she says the expected lift was closer to 500,000.