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Property prices in Sydney and Melbourne are expected to keep falling in 2025 as rising housing stock and economic pressures weigh on demand. Uncertainty remains while the Reserve Bank of Australia (RBA) considers its next interest rate decision.
Simon Arraj, founder of Vado Private, said a potential 25-basis-point interest rate cut in May could ease some pressure on the market, but lower building approvals could limit the extent of price falls in 2025.
“We could see some further drop in house prices in Sydney and Melbourne with a recent increase in housing stock marketed for sale, opening up greater bargaining power for buyers and placing downward pressure on house prices. However, we are also seeing lower building approvals for dwellings compared to three years ago, so the restriction in housing supply could place a floor under any fall in property values in 2025,” Arraj said.
New data from the Australian Bureau of Statistics (ABS) highlights the challenges in housing supply. The total number of dwellings approved fell 3.6% in November to 14,998 on a seasonally adjusted basis, reversing a 5.2% rise in October 2024. Approvals for private sector houses declined by 1.7%, while other private dwellings dropped by 10.8%.
While Arraj is optimistic about a potential rate cut, he warns that a different decision by the RBA could deepen the downturn. He estimated that cumulative price drops in Sydney and Melbourne might reach 10% to 12% this year, citing the impact of high household debt and the rising cost of living on buyers.
He also noted that mortgage costs are unlikely to ease until at least the second half of 2025, as the RBA monitors inflation and labour market conditions: “Households may have to brace for higher interest rates for many months more. The RBA's inflation target of 2% to 3% remains a key focus. The central bank will be closely observing the inflation numbers and the labour market and whether the jobless rate continues to tighten below 4% or rises back above that level.”
Despite falling prices, Australia’s property market remains heavily influenced by a chronic housing shortfall. Data from AMP estimates the undersupply at over 200,000 dwellings, with delays and cancellations in construction projects adding to the issue.
ABS figures show household wealth reached a record $16.88 trillion in September 2024, with $11.36 trillion of that concentrated in property assets. Arraj suggested that Australian households might benefit from diversifying their investments: “For income-seeking investors, private credit investments can deliver yields around 8% to 10% per annum, significantly higher than typical yields on cash or residential properties, which can help to deliver reliable income streams.”
With rate uncertainty shaping the market, the trajectory of Sydney and Melbourne property prices in 2025 will depend heavily on the RBA’s next steps.
