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Sydney and Melbourne housing prices could fall by 5 per cent in 2025, driven lower by a glut of listings, unaffordable prices and high interest rates, the latest Housing Boom and Bust report by SQM Research predicts.

Property prices in Canberra and Hobart are also predicted to drop by up to 6 per cent and 3 per cent respectively.

Report author and SQM Research managing director Louis Christopher said the bulk of the forecast price falls would occur in the first half of next year before interest rate cuts, which are expected by the June quarter.

“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,” he said.

“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.”

Sydney home values started to weaken last month, albeit marginally, falling by 0.1 per cent, while Melbourne slipped by 0.2 per cent, separate CoreLogic data shows.

However, the pace of decline has increased over the four weeks that ended on November 24, with CoreLogic’s daily index showing prices falling by 0.2 per cent and 0.3 per cent in the markets respectively.

The two leading indicators for housing prices – auction clearance rates and the amount of stock on market – suggested price drops in those cities would persist, Mr Christopher said.

Clearance rates have slumped to the low 40 per cent range across Sydney, which historically has indicated housing price falls of a moderate to potentially heavy extent, according to SQM’s data. Melbourne’s clearance rates have fallen to around 45 per cent, signalling an ongoing downturn.

At the same time, stock on the market has piled up. Stock levels are running higher than the start of the downturn of 2018 to 2019 – a period where Sydney housing prices fell by about 12 per cent from peak to trough.

‘Ripe for a correction’

Similarly, in Melbourne, total listings have blown out to about 42,000 dwellings – 5000 above the long-term average, and a level that has created housing price falls in the past, SQM’s analysis shows.

“The Sydney housing market is ripe for a correction. Our leading indicators tell us it’s happening, and our fair valuation models tell us it should be happening,” Mr Christopher said.

“Melbourne currently has a surplus of properties and the situation has deteriorated over the course of 2024, indicating an ongoing weakness in the market.

“But we’re not expecting a house price crash because there’s still a considerable shortage of homes in those cities compared to underlying demand for accommodation.”

By contrast, house prices in Perth, Brisbane, Adelaide and Darwin are expected to pick up steam.

Perth prices are forecast to rise by up to 19 per cent, the sharpest increase of all capital cities, followed by Brisbane with 14 per cent growth, Adelaide with 13 per cent rise and Darwin with 8 per cent gain.

While still the largest gains in the country, they are slower than the increases notched up so far this year. As at the end of October, Perth dwelling values had increased by 24 per cent, Brisbane was up by 14.5 per cent and Adelaide by 14.8 per cent according to CoreLogic.

“We’re seeing nothing in those markets that suggests an imminent price decline,” Mr Christopher said.

“Stock levels are extremely tight, demand is very strong due to ongoing population growth and their economies are doing well.”

Interest rate factors

Mr Christopher’s base case prediction – one of the four potential scenarios – assumes interest rates fall by 0.5 per cent by mid-next year.

The forecast is also based on the assumptions that population growth is at least 500,000 over 2025, and that there are no new spikes in inflation that would trigger a rate rise or would prompt the RBA to hold off easing.

In a second scenario where there is no rate cut, but no surge in inflation, and with population still increasing by 500,000 or more, house prices in Sydney and Canberra would tumble by 8 per cent, Melbourne by 7 per cent, and Hobart by 5 per cent.

It will reduce Perth’s price gains to 11 per cent, Brisbane 9 per cent, Adelaide by 8 per cent and Darwin by 7 per cent.

Paul Bloxham, HSBC’s chief economist said the risk of the Reserve Bank not cutting interest rates has increased.

“On a core basis, the economy is still operating at, probably still a bit beyond its full capacity, and the very slow decline in inflation means the RBA really can’t consider cutting interest rates anytime soon,” he said.

“The job market is still at, or slightly beyond full employment and does not appear to be loosening further at this stage.

“If it turns out the job market is not loosening further, then rate cuts may not happen at all. At the moment, we think there is a 25 per cent chance that interest rates don’t get cut at all in 2025.”

Oxford Economics senior economist Maree Kilroy said while interest rate cuts could be delayed until June next year, they would be deeper than what the market was predicting.

“We’re expecting the RBA to slash the cash rate by a total of 1.25 percentage points to bring it back to neutral settings,” she said.

“This will improve mortgage affordability and help price growth in the following year.”

House prices are now falling across two out of every five Sydney suburbs, a five-fold increase from a year ago, and the highest level in 20 months, data from CoreLogic shows.

The share of Melbourne suburbs where house values dropped in the past three months also blew out to 76.3 per cent, six times higher than last year.

Tim Lawless, CoreLogic’s research director, said the downturn was becoming more widespread as stock levels rose, borrowing capacity shrank and affordability worsened.

“We’re now seeing a fairly broad-based, but so far, mild downturn,” he said. “Sydney is still in the early phase of the downswing, so we’ll probably see more suburbs where house prices drop in the coming months.”

Sydney home values fell by 0.1 per cent last month, the first monthly decline in almost two years, while Melbourne dipped by 0.2 per cent as the housing outlook dimmed.

The number of Sydney suburbs where house prices fell over the past three months to October jumped to 225, up from just 46 last year.

Similarly in Melbourne, values have dropped across 290 suburbs, a sharp rise from only 48 a year ago.

Louis Christopher, SQM Research managing director, said house prices in both cities were on track to fall further in the coming months.

“Auction clearance rates are now falling in Sydney, well beyond the seasonal weakness, and we’re seeing a marked increase in distressed selling across Melbourne,” he said.

“There are now 1117 total distressed listings in Melbourne as of November 6, which is the highest level since we started tracking in 2020.

“In the past year distressed selling surged by 28.4 per cent, which tells me there are more property owners that are struggling financially, as confirmed by the rising default rates,” Mr Christopher said.

Moody’s Ratings analysis showed mortgage delinquency rates increased across the country over the year to May. Melbourne emerged as the epicentre of arrears. The portion of mortgage defaults across the city increased by 0.73 of a percentage point to 2.54 per cent, just behind Hobart, which posted a 1.3 percentage point rise in arrears to 2.68 per cent.

Melbourne dominated the top 20 suburbs with the highest mortgage default rates. Fourteen suburbs posted delinquency rates as high as 5.37 per cent. By contrast, many suburbs with the lowest default rates were in Brisbane and Sydney.

However, there are signs that worsening affordability has started to weigh across Brisbane, as house prices dropped in 36 suburbs out of 326, an eightfold rise from just four suburbs last year.

House values lower

Nationally, house values for about one out of three suburbs have drifted lower, which is more than double from a year ago.

By contrast, the number of Adelaide suburbs where house values fell over the past three months shrank by about half, while prices in all Perth suburbs rose during the same period.

The surge in listings across the biggest capitals has significantly outpaced demand, which has weighed on prices.

Total listings climbed by 7.1 per cent across Sydney over the past four weeks to November 3 compared to a year ago and lifted by 4.2 per cent and 4.9 per cent in Melbourne and Brisbane, respectively.

Total listings are now 13.2 per cent above the previous five-year average in Sydney and 13 per cent higher in Melbourne.

“Values are still falling in Melbourne because of a big increase in listings by disgruntled investors selling up in Victoria,” said Scott Kuru, co-founder of property investment advisory Freedom Property Investors.

“Nevertheless, this is a great time to buy in Melbourne. Melbourne property is seriously undervalued at the moment, especially when you look at population inflows – from overseas and other states – to what’s arguably now Australia’s largest city.

“Buying conditions probably aren’t going to get much better in Melbourne, but if you see a great investment grade property in Brisbane or Sydney I wouldn’t hang around on the off chance prices might decline,” he said.

Sydney downturn ‘accelerating’

The upper end of the housing market posted the sharpest decline of up to $326,000 in just three months as demand wanes amid higher borrowing costs and property prices.

House prices in Rodd Point in Sydney’s inner west, along with Abbotsford and Balmain East slumped by at least 7 per cent or the equivalent declines of between $221,797 and $325,846 during the same period. Those suburbs have also dropped by 8.2 per cent, 7.6 per cent and 2.1 per cent in the past 12 months respectively.

“The downturn in the top 25 per cent of the housing market, particularly in Sydney is clearly gaining some momentum,” Mr Lawless said.

“House values in this segment had been falling since June last year and in the past two months alone, they declined by 1.1 per cent, which is nearly twice as fast compared to the previous two months.

“So, it doesn’t look like this trend is turning around. It seems like it’s actually accelerating,” he said.

Across Melbourne, house values in inner suburbs Albert Park, South Melbourne and Port Melbourne tumbled by 9 per cent, 8.6 per cent and 8 per cent respectively, equating to a loss of between $132,882 and $213,677 in the past three months.

In Brisbane, Teneriffe led the largest drops in house values, at 4.8 per cent or a decline of $100,571 in the median.

House prices in suburbs within Adelaide’s Central and Hills district also weakened, with Hazelwood Park, Rosslyn Park and Kensington Garden posting 3 per cent, 2.6 per cent and 1.8 per cent respectively.

The total worth of Australia’s housing market surged to a record $11 trillion in September as more homes were built and prices continued to rise despite higher interest rates, data from CoreLogic shows.

Home values increased by 6.7 per cent in the past 12 months, delivering a $900 billion windfall to residential property owners.

Over the year to June, a total of 176,000 new homes were also completed and added to the market, according to the Australian Bureau of Statistics.

Kaytlin Ezzy, CoreLogic’s economist, said the total value of the residential sector would continue to rise in the coming years as more homes were built, and dwelling prices lifted further.

“The government hopes to add 1.2 million new homes over the next five years, which would definitely help push the overall value for the Australian residential market higher,” she said.

“We’re also expecting prices to rise over the near to medium term, although the pace of growth would likely ease as we move into spring with more supply coming online.”

Shane Oliver, AMP chief economist said the record high valuation proved the housing market’s resilience and its long-term track record of rising prices.

“This shows that household wealth, which is largely tied to residential real estate, is strong and continuing to rise,” he said.

“Property has come to be relied on as a good way to build wealth, so people still want to get into property, and once there, they do whatever they can to service their mortgages, even if it involves giving up on things for a while.

“But it’s getting harder each year as property prices rise faster than people’s incomes do, which is resulting in greater levels of wealth and intergenerational disparity.”

While price growth is expected to slow in the coming months, the prospect of long-term capital gains would likely entice more property investors, who were already returning in droves, back into the market, Ms Ezzy said.

National home values rose by just 1 per cent in the September quarter, the softest quarterly rise since March 2023.

New listings rose 2.1 per cent over the year to October 6, marking the strongest start to the spring selling season since 2021.

“The surge in new listings have also contributed to the slowdown in value growth as the market absorbs the additional stock,” Ms Ezzy said.

“As we move through spring, we’re likely to see further moderation in value growth as new listings continue to rise, providing some relief for home buyers who have faced intense competition over the past year.

“The increase in available stock is also providing more opportunities for investors to enter the market, which wasn’t the case during last year’s constrained conditions.”

The share of new investor loans surged to 38.6 per cent in August, the highest level since 2017 when the Australian Prudential Regulation Authority further tightened lending rules to investors by limiting the portion of interest rate only loans to 30 per cent of all lending.

“The high investor activity is likely due to the perceived opportunities for capital gains over the long term and tighter rental market conditions driving potential yield growth,” she said.

In the past 10 years, house values climbed by 85.9 per cent nationwide, or the equivalent of $403,349, while units gained 41.2 per cent or $193,706.

Sydney’s house prices climbed by 95.2 per cent to $1.47 million, Brisbane jumped by 97.8 per cent to $973,534, while Melbourne lifted by 70.4 per cent to $925,762.

Adelaide house values rose by 94.9 per cent to $856,856, Hobart was up by 89.6 per cent to $692,504 and Canberra by 77.9 per cent to $966,684.

Despite Perth’s recent strong showing, house prices only increased by 58 per cent in the past 10 years to $830,965.

Sydney’s premium suburbs Bellevue Hill and Dover Heights topped the biggest gainers, with values more than doubling in the past decade. Their house prices increased by $6.8 million or 162.1 per cent to $11 million, and by $3.7 million or 144.6 per cent to $6.23 million respectively.

House prices in cheaper suburbs Leppington and Ruse in the south-west also rose sharply, increasing by 164.7 per cent and 140.5 per cent respectively.

Across Melbourne, suburbs in the Mornington Peninsula such as Somers, Portsea and Sorrento dominated the long-term performers, with their median increasing by more than 140 per cent.

House prices in Brisbane’s D’Aguilar in the city’s north and Robertson in the south racked up the largest gains at 167.7 per cent and 148 per cent respectively.

News feature Affordability, supply, interest rates and high immigration create a scenario in the US that is all too familiar, writes Matthew Cranston.

Abla Assikouyo, a nanny who emigrated from Togo, and her husband Komi, who works at an Amazon warehouse, have just experienced one of life’s great challenges: buying their first home in America.

But the couple’s experience was made almost unbearable by pressures all too familiar to millions of Australians: cost-of-living strains, rising home prices, high interest rates, and supply shortages.

‘‘It was very, very difficult,’’ says Abla, 35, who has three children. ‘‘We got a loan approval for $US500,000, but then they reduced it to $400,000 because of our jobs and our expenses like car loans. So, even when we found the right house, it was difficult for us to pay.’’

A months-long search finally yielded a three-bedroom home in the county north of Washington for $US475,000 ($712,000), still well above their loan offer. However, one of America’s largest lenders agreed to cover all but their deposit of just 3 per cent, charging a 6.99 per cent interest rate.

‘‘We were lucky. My [extended] family started looking before us for one year, and they could not get anything. They had a loan, but they couldn’t buy one, so they went back to renting. The competition is very bad,’’ says Abla

As in Australia, America’s first home buyers are struggling to break into the market. Despite high interest rates, which often depress prices, supply constraints and new housing stock shortages are keeping prices relatively high.

The result is that affordability in the US, while not as bad as Australia, has deteriorated. The classic measure of affordability – median home price to median household income – varies widely from one population centre to the next, but the average, of four times, is high by historical standards, according to analysts Demographia.

In Australia, average prices are nine times household income.

Consequently, first home buyers now account for just 30 per cent of purchases in the US, down from 50 per cent 10 years ago.

In Canada, where the federal government has announced billions of dollars in new loans and tax breaks, housing affordability has also worsened, despite a recent jump in new home starts to their highest level in seven months.

In the US and Canada, the housing crisis has been aggravated by a surge in immigration, also a key contributor in Australia. With America’s growing immigration problems, demand is outpacing supply. US residential property prices increased 5 per cent in the past year, despite the 22-year-high interest rates. Rents are also still rising at more than 5 per cent a year.

Supply is lacking. The seasonally adjusted number of new private housing units under construction in the US has fallen for the past five months and is down 4 per cent from this time last year, despite hitting a record 1.7 million last July. Economists expect another low number when the latest figures are released on Thursday (Friday AEST).

President Joe Biden has pledged to tackle the crisis, but experts say his administration is too focused on making it easier to buy homes, rather than increasing the number available.

‘‘Government is very good at adding to demand, but very poor at adding to supply,’’ says Edward Pinto, co-director of the American Enterprise Institute’s Housing Centre.

‘‘When you have a supply shortage, and you increase demand, the inevitable result is that prices go up. And so, rather than making housing more affordable, the government makes it less affordable. That in a nutshell is the problem we face,’’ he tells The Australian Financial Review.

Biden is promising to add 2 million new ‘‘affordable’’ homes to the market if he gets tax credit legislation passed in Congress. Prime Minister Anthony Albanese has set a target of 240,000 new homes a year – twice the number currently being built in Australia.

Biden is proposing a $US10,000 tax credit for first-time home buyers and those who sell their starter homes. His administration estimates the credit would reduce the mortgage rate on a median home by more than 1.5 percentage points for two years. More than 3.5 million middle-class families could benefit, it says. Presidential rival Donald Trump has not announced any major policy on lifting affordable supply. But he says one solution is to remove investment property tax credits, something Australia’s Labor Party proposed during the 2019 election.

Pinto agrees abolishing tax deductions for second homes could make a difference to supply. ‘‘If the government stopped subsidising second homes through the interest deduction, those existing homes could convert from second homes to primary residences. It would decrease demand because people wouldn’t be buying as many second homes,’’ he says.

Some 700,000 homes would shift from being second homes to primary residences over 10 years if the idea went ahead, Pinto’s institute has calculated. But Congress is unlikely to agree on the initiative, as many legislators who own second homes would take a hit, he says.

While governments in Australia, the US, Canada and elsewhere are struggling with measures to boost supply, others are tackling the situation by getting out of the way. A surge in illegal immigration has resulted in skyrocketing home prices in California, prompting an exodus of residents to Texas, searching for cheaper houses.

That’s proved an economic boon for Texas, which has a low regulatory environment. Texas built more homes than any other state in the year to July 31, 2023, adding 260,000 – more than twice as many as California, according to the US Census.

Texas home builder Steve Boyd says his higher-end home building business has grown at 10 per cent every year for the last few years. He’s been able to hold his margin despite rising costs.

‘‘The demand has been really good for us,’’ he says. ‘‘But I don’t see how the government can help the supply, though. Maybe removing more regulation.’’^AFR