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.”