Information from several new datasets adds weight to the argument that Australian home prices will continue to rise at pace in 2025.
The data, from government sources such as the Australian Bureau of Statistics and the Federal Department of Education, tends to suggest recent modest housing price forecasts by big financial institutions like AMP may be too conservative.
AMP’s view
In a new economic note on housing, AMP’s long-serving Chief Economist Shane Oliver declares the financial giant believes Australian residential home prices will rise “around 3%” this year, after experiencing 4.9% growth in 2024.
Dr Oliver made the prediction while commenting on the latest CoreLogic Home Value Index data, which shows median home values rose 0.3% in February, after experiencing a brief three-month downturn of just 0.4%.
“The upswing came in anticipation of, and then confirmation of, an RBA rate cut which boosted buyer confidence,” he says.
“RBA rate cuts are expected to drive a modest upswing in average prices this year.
“However, while there is still a big housing shortfall in Australia (AMP has previously estimated this shortfall to be between 200,000 and 300,000 homes), the upswing will be starting from a point of still poor affordability, as interest rates are only likely to fall modestly, and population growth is slowing,” Dr Oliver says.
Housing affordability improvements
It’s worth noting that AMP’s own analysis points to a significant improvement in housing affordability over the year ahead, particularly when it comes to potential increases in borrowing capacity for people looking to buy a property.
The Reserve Bank of Australia’s decision to cut the cash rate by 0.25% at its February board meeting from a 13-year high of 4.35% is likely to have a significant impact on borrowers.
“Roughly speaking, the 0.25% rate cut, when passed on to variable mortgage rates, will add about $9000 to how much a buyer on average earnings can borrow, which along with three further rate cuts into early next year, will drive a significant increase in the capacity of buyers to pay for a property,” AMP’s Shane Oliver writes.
Allowing for wage growth over the year ahead, Dr. Oliver’s chart (see above) clearly shows that the combination of more rate cuts and wage growth will allow many households to borrow tens of thousands of dollars more to buy a property than they can now, while not overextending themselves.
“Mortgage stress” is typically defined as when a household spends more than 30% of their gross income on housing costs.
Dr. Oliver’s calculations assume mortgage payments will make up a maximum of 28% of household income.
Any easing of borrowing capacity is expected to see tens of thousands more buyers become active in the property market, increasing demand for limited supply and driving up prices.
The per-capita recession is over
Australia’s latest official economic growth figures, released by the Bureau of Statistics on the 5th of March, also show the saving-to-income ratio of households rose to 3.8% (up from 3.6%) in the December quarter of 2024.
In other words, in the last three months of last year, Australian households were more able to save for big one-off expenses like home deposits, than they were the previous quarter.
Significantly, the ABS figures also show the economy has finally emerged from its longest recorded per-capita recession.
While the Australian economy grew by 0.6% in October, November and December 2024 (1.3% year-on-year), in per capita terms GDP grew by 0.1%, the first increase in no less than eight quarters.
While this is only a small uplift after a long cost-of-living crisis, the fact living standards are no longer falling for Australians will eventually translate into stronger consumer sentiment, particularly around big decisions, like purchasing a home.
Population growth
Another of AMP’s arguments for only modest growth in home prices in 2025 is a purported easing in population growth.
“Slower population growth, reflecting a crackdown on student visas and increasing departures as the post-pandemic surge in long-term visas expires, will likely lead to a further easing in the rental market, which will help take some pressure off the home buyer market,” according to Chief Economist Shane Oliver.
However, new figures show there were record enrolments and commencements by international students in the year to November 2024.
Data released by the Federal Department of Education shows there were 1,081,300 international student enrolments in the year to November 2024, up 120,454 (or 12.5%) from the previous record set in 2023.
Far from a “crackdown”, international student numbers are still rising.
The Federal Education Department estimated last year that overseas students were already utilising about 7% of the available accommodation in the private rental market.
Final thoughts
AMP’s Shane Oliver says the key factors influencing home prices in the year ahead will be interest rates, unemployment and population growth.
“A return to RBA rate hikes or less cuts than we are forecasting, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a resumption of property price falls, reflecting the divergence between home buyers’ capacity to pay and current home price levels,” he says.
“On the flipside, a faster fall in rates on the back of weaker-than-expected inflation could drive a stronger upswing in property prices.”
Dr Oliver's final observation is telling, admitting that he and many other market watchers have a long track record of underplaying the strength of the prospects for Australian residential property.
“And of course, Australian home prices have had a tendency to surprise economists (like me) and many others on the upside over the last few decades,” he concludes.