A leading economist is expecting residential property values to appreciate in 2025, but at a slower rate than the market witnessed in 2024.
Specifically, AMP chief economist and head of investment strategy Shane Oliver predicted average property prices to increase by 3 per cent, down from the 4.9 per cent rise seen in 2024.
Oliver noted his forecast has been made on the back of an economic cycle where the interaction between property prices and interest rates was unusual.
“With prices having risen over the last two years taking them to record levels relative to average incomes despite rising and ‘high’ mortgage rates, in contrast to the normal cyclical relationship where high rates depress prices, it’s possible that the housing market has already moved ahead of future interest rate cuts so it may take longer for the start of rate cuts to boost prices, particularly if unemployment starts to rise significantly,” he noted.
“Record price-to-income ratios and the easing cycle in interest rates likely to end with mortgage rates well above the lows seen in 2021 suggest that the next cyclical upswing in property prices may be relatively mild compared to past upswings.”
However, he said investors need to monitor what happens to three critical components of the economy to glean a more accurate picture of the direction residential property prices are likely to take this year.
“The key to watch will be interest rates, unemployment and population growth. Further delays in rate cuts, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a much sharper fall in property prices, reflecting the divergence between homebuyers’ capacity to pay and current home price levels,” he noted.
According to Oliver, the Reserve Bank of Australia is likely to commence cutting the official interest rate in May with a 25-basis-point reduction. He expects this to be followed by two more decreases of the same magnitude later in the year.
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