2025 property market boom or bust dependent on interest rates

Whether or not Australian real estate markets soar or struggle is almost entirely down to whether or not interest rates are cut in 2025.

That’s the finding of SQM Research, which on Tuesday released its Christopher’s Housing Boom and Bust Report 2025 that concluded Perth was set for another bumper year regardless, while property prices in Sydney and Melbourne would likely retreat by up to 5 per cent.

The report factored in a series of potential economic eventualities, but used its base case scenario as one in which there would be a 25-50 basis point rate cut midway through next year and population growth of 500,000-plus.

In that circumstance, the report forecast property values would rise 1-4 per cent as long as there were no new inflationary outbreak events.

Sydney and Melbourne housing prices are predicted to continue to record moderate housing price falls of between 1 to 5 per cent, while Canberra was the market to avoid with expected price falls of 2 to 6 per cent.

Perth, Brisbane, Adelaide and, more surprisingly given its current stagnation, Darwin are expected to outperform the national housing market with Perth forecast to record the fastest dwelling price rises of between 14 to 19 per cent.

Brisbane is forecast to record strong dwelling price rises of between 9 to 14 per cent in what will be its 12th straight year of dwelling price increases.

In Melbourne, the bulk of the weakness over 2025 is likely to occur in the inner-city ring where SQM has been recording surges in distressed listings. However, given the underlying shortages in homes as has been recorded in the rental market, once interest rates are cut, SQM anticipates a quick rise in Melbourne buyer demand.

If interest rates were to remain at their current levels deep into 2025 it would be a very different scenario that played out across the country’s diverse property markets.

It has been a year since the RBA last changed the cash rate. The big four banks remain confident a rate cut will come early in the new year but the Reserve Bank of Australia (RBA) inflation forecasts ensure there is still plenty of cause to doubt that.

The RBA’s November monetary policy statement predicted headline inflation will gradually decline from 3.8 to 2.8 per cent in June 2025, easing towards the RBA’s target band of 2-3 per cent before lifting out of the range with 3.7 per cent in December 2025, dropping back to 2.6 per cent by the end of 2026.

Those estimates do little to instil confidence the cautious RBA Board will leap into rate cuts if it sees inflation at 3.7 per cent by the end of next year.

Nor does the October inflation data released Wednesday (27 November) shift the dial. The RBA’s preferred trimmed mean inflation measure rose slightly last month from 3.2 per cent to sit at 3.5 per cent.

Were the RBA to hold out on rate cuts in 2025, SQM’s research paints a markedly less buoyant picture of the national property market.

SQM’s second most likely scenario is where interest rates are not cut at all over 2025 but population growth remains strong. Sydney, Melbourne, Canberra and Hobart housing prices are expected to fall further in such an event, however, Perth is still expected to record a strong market given the strength and momentum that is currently in place.

Louis Christopher, Managing Director of SQM Research said for 2025 they were not anticipating much of a change in current population trends but were anticipating a cut in interest rates starting from mid-year that would continue the price rise momentum in Perth, Brisbane and Adelaide and keep the price falls in Sydney and Melbourne to single digits.

“To be sure, our two largest capital cities, along with Canberra and Hobart will start 2025 off in the red; indeed, we are currently recording dwelling price falls in each of these cities.

“Current interest rate settings are biting the community more in these cities which on our measurements, are in overvalued territory and/or are experiencing slower economic growth compared to the cities (and states) that have enjoyed good economic growth through a buoyant commodities market and/or have had generous contributions from GST receipts.

“However, once interest rate cuts do occur, we are expecting a speedy bounce in demand for Sydney and Melbourne in particular, which both are still experiencing underlying housing shortage relative to the strong population growth rates.

“This may well mean there is a good window for buyers at this time for our two largest capital cities.

“If rate cuts do not occur in 2025, it is unlikely a recovery will occur in Sydney and Melbourne at any time next year,” Mr Christopher said.