Rate cuts and FOMO to drive property prices in 2025

Scott Kuru January 3, 2025 4 min read

Image by Michaela Pollock

KEY POINTS

Domain Group is forecasting national house prices will increase between 4 and 6% in 2025, with units set to grow at 3 to 5%
While growth may be slow in the first half of the year, interest rate cuts by the Reserve Bank and FOMO are expected to drive activity in the second half
In the most optimistic scenario, Sydney’s median house price could reach $1.75 million by the end of 2025, over 60% higher than Melbourne’s

Real estate data analytics firm, Domain Group, has unveiled its price growth forecasts for 2025, suggesting market momentum will increase substantially when the Reserve Bank of Australia begins cutting official interest rates.

With many observers predicting any cash rate cuts are unlikely before May, Domain suggests this may create “a year of two halves, with a weaker first half and a stronger second.”

The predictions are contained in Domain’s end-of-year wrap report for 2024, “Housing Market Strength Amid Economic Turbulence.”

The details

The report’s author - Domain Group’s Chief Economist, Dr Nicola Powell - says 2024 was marked by “relentless cost-of-living pressures and a cash rate that remained higher for longer than many had hoped.”

Nevertheless, she says the “housing market demonstrated remarkable adaptability and strength.

“A combination of chronic undersupply, strong population growth and high construction costs coupled with labour challenges helped sustain the market.”

That saw national property prices continue to climb in 2024, with Perth, Adelaide and Brisbane “emerging as standout performers”.

Domain’s report notes, however, that price growth momentum slowed towards the end of 2024, with more listings on the market and some potential buyers holding back because of affordability concerns.

While Dr Powell believes this slower momentum could continue into the early months of 2025, she says, “An interest rate cut or targeted stimulus measures could trigger a wave of demand and spark price growth as the housing market responds to this newfound momentum.”

“It may take one or two rate cuts to motivate buyers into action, and the timing of these cuts will shape market dynamics in 2025, perhaps creating a year of two halves, with a weaker first half and a stronger second.

“Alternatively, easing the mortgage serviceability buffer would unlock greater borrowing power for many, speeding up market access and lowering the cost of debt.”

Based on this “year of two halves” scenario, Domain forecasts that nationally in 2025, houses are set to see price growth of 4 to 6%, while units will grow at a slightly lower rate of 3 to 5%.

On average, price growth will be more pronounced in capital cities rather than in regional Australia, but there will also be wide variations across the country, with Perth, Adelaide and Brisbane set for more solid price growth on top of their spectacular gains over the last two years.

Domain forecasts growth of 8-10% for both houses and units in Perth, while Adelaide dwellings stand to see 7-9% growth.

A chronic apartment shortage in Brisbane is predicted to see units in the Queensland capital forge ahead by 7-9%, while there will be more subdued growth of 5-7% in the city’s house market.

Australia’s most expensive property market, Sydney, is predicted to see both houses and units grow by 4-6%.

Melbourne will stage a recovery of sorts, with house prices predicted to grow 3-5%, but the city’s unit market is tipped to underperform, with predictions of -2 to 0% growth.

If Domain’s most optimistic predictions are right, that could see 2025 finish with a median Sydney house price of $1.75 million and houses in once-affordable Perth finishing the year just shy of the $1 million mark.

That also means that for the first time in 20 years, Sydney and Melbourne will have a gap of more than 60% between their median house prices, underlining again the huge property affordability advantage the Victorian capital enjoys over its more expensive northern rival.

Ms Powell believes the lack of affordable housing and supply issues will be a major issue in the 2025 federal election, saying, “A change in government could bring targeted measures such as first-home buyer incentives, reforms to negative gearing and capital gains tax, replacing stamp duty with a land tax, support for affordable housing projects, and initiatives to stimulate construction activity.”

And while the economic outlook - both domestically and internationally - remains uncertain, she believes one of the main drivers of the property market could be FOMO (fear of missing out).

“Even a slight decrease in borrowing costs could reignite buyer confidence, prompting many to act quickly before prices rise further,” she says.

“Heightened buyer activity may bring back FOMO as buyers anticipate increased competition and higher prices.

“This urgency is amplified in areas with constrained housing where buyers seek to secure purchases as financing becomes more attainable.

“Such behavioural shifts could bolster demand and contribute to upward price pressure,” Dr Powell says.