Residential Housing Prices

IBISWorld forecasts residential housing prices to rise by 3.0% in 2024-25, to reach 200.5 index points. Price growth is expected to slow following the substantial hike seen in the previous year. The Reserve Bank of Australia (RBA) has raised the cash rate from its historical low to ease inflationary pressures in recent years. As banks pass on these rate hikes, borrowing costs have surged, disincentivising some new homeowners from entering the market and slowing activity in the residential housing market. Nonetheless, supply-side induced pressures, like escalating construction costs and labour scarcity, have continued to weigh on construction activity, exacerbating the price hike. The high borrowing costs also pose a barrier for construction companies and developers, who often rely on leverage to manage their cash flows or kickstart new projects, exerting further downward pressure on supply. Despite these increased borrowing costs, the RBA holding cash rate has maintained high levels of new loan commitments taken out by new homeowners in 2024-25. Many existing homeowners who have secured fixed-rate mortgage terms have been effectively shielded from the rising borrowing costs. This has eliminated the need for them to sell their properties, keeping house prices higher than they would be. This demand and supply imbalance is why high borrowing costs have not dampened house prices. Moreover, as inflationary pressures have gradually eased over 2024-25, the potential for the RBA to drop the cash rate early in 2025 will place upward pressure on residential housing prices.

At the start of the past five years, record-low interest rates have supported the continuous upwards momentum of residential housing price growth. Since July 2019, APRA no longer expects banks to assess home loan applications using the minimum interest rate buffer of 7.0%. Instead, they were allowed to use their floor rate or a 2.5% buffer. This reduction in interest rate buffer has made mortgages more accessible to borrowers. Additionally, many first home buyers returned to the residential property market over the period. Federal and State government initiatives to improve affordability for first home buyers, like the First Home Buyer Schemes, First Home Super Saver Scheme and First Home Guarantee have encouraged housing market activity and buoyed prices. Although residential housing prices came under pressure in the early stages of the COVID-19 pandemic, record low borrowing costs, pent-up buyer demand, and mortgage repayment deferrals offered by lenders limited adverse effects on the Australian housing market. These factors supported the record residential housing price growth in 2021-22.