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CommBank’s Forecast: Home Prices to Fall, Then Climb 4% by Year-End

CommBank’s Forecast: Home Prices to Fall, Then Climb 4% by Year-End

Australia’s biggest bank expects house prices to fall in early 2025 but rise again later in the year. Commonwealth Bank of Australia (CBA) forecasts a 4% increase in house prices by the end of 2025, despite expected interest rate cuts.

Housing Market to See Temporary Decline

CBA’s head of Australian economics, Gareth Aird, believes house prices will decline in the coming months. He says the market has slowed over the past year.

“Momentum has cooled when looking at the pace of home price growth over the past year. In turn, rental growth is also moderating in most parts of the country,” Aird said.

The affordability crisis has led to fatigue in the housing market. However, the bank warns that fear of missing out (FOMO) could drive prices back up once interest rates are cut.

“The housing market is a momentum market. And if buyer appetite responds quickly to an interest rate cut it is possible that fear of missing out once again becomes a key theme in the market,” he said.

Also Read: Big Four Bank Cuts Mortgage Rates Ahead of RBA Meeting

Sydney and Melbourne See Higher Listings

Melbourne and Sydney have seen an increase in houses for sale due to high interest rates and cost-of-living pressures. Victoria’s new tax regime has also made investment properties less attractive. Melbourne prices are falling, and Sydney’s growth has slowed.

CBA believes the Reserve Bank of Australia (RBA) has room to cut rates based on the latest inflation data. However, Mr Aird says many buyers held back due to uncertainty about potential rate hikes in 2024.

“That said, the correction in the Sydney and Melbourne markets is modest. And there is still a good amount of buyer appetite in most parts of the country,” he noted.

January Data Shows Market Trends

In January, Australian capital city house prices dropped for the fourth consecutive month. Regional areas saw a slight rise in prices.

  • Melbourne recorded the largest decline (-0.6%), followed by Canberra (-0.5%) and Sydney (-0.4%).
  • Adelaide had the biggest price increase (+0.7%), followed by Darwin (+0.6%), Perth (+0.4%), and Brisbane (+0.3%).
  • Hobart prices remained flat.

Nationally, house prices grew by 4.3% in the year to February, but growth has slowed. Melbourne saw the biggest annual decline (-3.3%), while Sydney’s annual gain of 1.7% was the lowest since June 2023.

Rental Market Trends

Rents increased by 0.4% nationwide in January. Capital city rents rose slightly, but regional rents increased 1.6% in the three months to February.

Gross rental yields remained at 3.5% in capital cities and 4.4% in regional areas.

Melbourne Becomes a Buyers’ Market

CoreLogic’s head of research, Eliza Owen, says Melbourne is now a buyers’ market.

“This is firmly a buyers’ market. That’s also reflected in ABS lending data which shows the biggest share of first home buyer finance is going to property purchases in Victoria,” she said.

Melbourne’s property values are 6.5% below their peak. Hobart has also become a buyers’ market, with values 12% below early 2022 highs.

However, Perth, Adelaide, and Brisbane remain challenging for buyers, with house prices at record highs.

High Interest Rates and Stock Levels Impacting Prices

Ray White’s chief economist, Nerida Conisbee, says the housing market has slowed dramatically.

“There’s a lot of stock out there. Interest rates are high, but this year we are looking at seeing maybe three or four rate cuts, so home loans will also get cheaper to pay off,” she said.

She also noted that Victoria’s stricter rental controls and new property taxes have created opportunities for first-home buyers.

“In a place like Melbourne at the moment there’s lots available at that sub-$750,000 price point in more desirable suburbs,” she said.

While houses remain out of reach for many, she says apartments in popular suburbs remain affordable.

“We are in a little bit of a stable position until those rate cuts come through,” she added.

Rate Cuts Could Boost Market Activity

Ms Owen says a rate cut could prevent further price declines and lift confidence.

“A reduction in the cash rate would massively boost consumer confidence. It would increase borrowing capacity, which would put upward pressure on values,” she said.

The bond market expects the RBA to lower the cash rate from 4.35% to 3.45% by the end of 2025. Markets predict the rate will settle at 3.3% in mid-2026.

CBA’s forecast sees home prices declining in early 2025 before rising again in the second half of the year. Auction clearance rates will be a key indicator of buyer sentiment.

With borrowing capacity set to increase as rates fall, the fear of missing out could once again fuel demand in the property market.

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