In today's Pulse, CoreLogic's Head of Research Eliza Owen looks at key changes in the economic landscape in 2025, and how it will influence the housing market.
As we step into 2025, the economic landscape is shifting. Pandemic-driven trends like high inflation and overseas migration are easing. The RBA cash rate might finally drop, with lending policies playing a role in how this impacts the market. Unemployment is set to rise, but those with secure jobs will enjoy higher real incomes. Residential construction is in transition—workloads are high, but new projects are slowing.
So what does it all mean for the market?
Lower interest rates to boost housing values and transactions, but not by much
Interest rates might be cut in early 2025 as inflation continues to drop, with annual core inflation falling to 3.2% in November (below the RBA forecast of 3.4% for December). Two of the big 4 banks are currently expecting a rate cut in February.
The industry should brace for the possibility that rate reductions may have little effect on home values and transaction activity this year. Even if the average mortgage rate drops by 135 basis points (the lower-bound of forecasts for the cash rate at the end of 2025), a median-income household could reasonably afford a $593,000 home — still much lower than the current median home value of $815,000. A rate of 3.1% by the end of 2025 is also higher than the pre-COVID, decade average (2.55%) that supported strong lending volumes in the 2010s.
A potential window into how Australians would respond to higher borrowing capacity is the Stage 3 tax cuts from 2024. While this would have boosted borrowing capacity through higher net income, the housing market saw an anaemic response, with growth in values slowing from June 2024.
Lending policy could amplify, or nullify, the impact of rate reductions
Changes to macroprudential settings (the policies used by regulators to reduce credit risk and support financial stability), will likely affect the availability of housing finance. Lowering the mortgage serviceability buffer from 3.0 percentage points to 2.5 percentage points (a reversal of the increase in October 2021) could boost home buying activity through increased borrowing capacity. However, this action from the regulator isn't guaranteed.
According to APRA's November statement, the risk of financial shocks hasn’t abated, and regulators have warned that high household debt levels are a major concern. If household debt levels rise as interest rates fall, APRA could introduce new measures, such as limits on high loan-to-value ratio (LVR) or high debt-to-income (DTI) lending, such as what the RBNZ has implemented in New Zealand.
Unemployment to rise, but unlikely to negatively impact housing values
The RBA forecast unemployment to rise to 4.5% by the end of 2025, but so far the labour market remains tight, and the unemployment rate is at just 4.0% (the pre-covid, decade average was (5.5%).
Assuming that the labour market does loosen this year (which is an expected result of lower inflation and economic demand), we might not expect much of an impact on the housing market. For the past two decades, there has been a mildly positive relationship between the unemployment rate and housing values, potentially because periods of rising unemployment trigger lower interest rate settings to stimulate the economy. For those who remain employed in 2025, lower inflation will also provide a boost to real incomes that could be put towards a deposit or housing transaction costs.
The devil will be in the detail of a looser labour market and its impact on housing in 2025. For example, rising periods of unemployment have historically impacted younger Australians (i.e. 15–24yr olds) more than other age groups, and these younger Australians are more likely to be concentrated in the rental market than in home ownership, thus having more of an impact on rental demand. However, there may be localised impacts on housing demand and value depending on industries and regions that face greater job loss.
Net overseas migration will continue to slow, taking some demand pressure off the rental market
Net overseas migration peaked at 556,000 in the year to September 2023 and fell to 446,000 by June 2024. According to the Centre for Population, it is expected net migration will continue declining to about 340,000 by mid-2025 as the 'COVID-catch up' effect fades as more short-term migrants leave.
While overseas migration isn't the only factor flowing through to rental demand, significant changes in migration patterns have impacted the market. The chart above compares the historic exposure of individual SA4 markets to net overseas migration with rental value changes between September 2023 and December 2024. Areas with high migration saw a substantial increase in rents in 2022 when border restrictions eased. Now, the slowdown in overseas migration appears to be reducing demand more quickly in these same rental markets.
Residential construction will remain low, but cost pressures could stabilise
New home approvals are low, with only 169,000 new dwellings approved by November 2024—a 24% drop from the decade average and 30% below the Housing Accord's average annual target (240,000). High construction costs, land costs, and interest rates, along with potentially diminished buyer confidence in the new home sector, have dampened approval numbers. There are some signs of a pickup, with dwelling approvals bottoming out in early 2024, which is most obvious in high capital growth markets like WA, SA and QLD.
Interestingly, about 250,000 approved dwellings are still incomplete. The slowdown in building activity will eventually ease capacity constraints, allowing for more timely delivery of homes and clearing the backlog. However, competition from public infrastructure sector for labour and input materials is likely to remain substantial. Continued government support and business investment are essential to boost productivity in residential construction.
Overall, despite rate cuts and easing inflation, 2025 is expected to see lower value growth and sales numbers than last year. This could involve a shallow downturn in values at the start of the year, followed by a mild recovery as inflation and interest rates move lower, real incomes rise and housing supply remains low.
Meet Eliza Owen
Head of Residential Research Australia
Eliza Owen was appointed the Head of Research at CoreLogic Australia in 2020.
Full profile