Housing Market Outlook for 2025: Key Trends to Watch

As we enter 2025, Australia's housing market is navigating a shifting economic landscape. The pandemic’s legacy—high inflation and overseas migration—is gradually easing, and while interest rates may drop, the impact on housing values and transaction volumes is expected to be modest.

Here’s a quick summary of the key trends:

1. Interest Rates and Housing Market Impact
   Interest rates are likely to fall, with some forecasts predicting a cut as early as February. However, even with lower rates, housing values and transaction activity may not see significant increases. The median home price remains well above what the average household can afford, and the rate reductions won’t bring back the pre-COVID lending volumes.

2. Lending Policies and Borrowing Capacity
   Changes to lending policies, like a potential reduction in the mortgage serviceability buffer, could boost borrowing capacity, but this depends on regulators' caution around rising household debt. Any policy shifts will need to balance financial stability with increased access to home loans.

3. Unemployment and Housing Values
   Unemployment is forecasted to rise to 4.5%, but historically, periods of rising unemployment have had a mild positive effect on housing values due to lower interest rates. Those who stay employed will benefit from rising real incomes, which could support housing transactions.

4. Slowing Overseas Migration
   Net overseas migration, which drove rental demand in recent years, is expected to continue its decline. This will take some pressure off the rental market, especially in areas that saw the largest influx of migrants post-pandemic.

5. Residential Construction
   New home approvals remain low due to high construction costs and interest rates. However, a backlog of 250,000 approved dwellings will eventually ease supply constraints, though competition from public infrastructure projects will continue to limit construction productivity.

Outlook for 2025
While 2025 may see lower housing value growth and transaction numbers compared to last year, the market could experience a mild recovery as inflation, interest rates, and real incomes improve. Overall, expect a period of stability with modest shifts in the housing landscape.

In summary, while the housing market faces headwinds, a combination of economic adjustments could lead to a slow but steady recovery later in the year.