The Australian property market showcased remarkable resilience during 2023 and 2024, countering many predictions of a downturn. Despite facing economic challenges, the market remained stable, with property prices continuing to rise due to limited supply and strong demand. As we approach 2025, several significant economic, demographic, and structural factors are expected to drive ongoing stability and growth.
A convergence of elements is setting the stage for sustained price growth over the coming years, especially for well-situated, investment-grade properties.
Strong Population Growth
Australia’s immigration policies are fuelling unprecedented population increases, particularly in major urban centres such as Sydney, Melbourne, and Brisbane. This trend is expected to sustain housing demand in both ownership and rental markets.
Chronic Housing Supply Constraints
The persistent shortage of new housing, worsened by high construction costs and a lack of skilled labour, means demand will likely continue to outstrip supply, especially in sought-after areas.
Skilled Labor Shortage in Construction
The limited availability of skilled labour in the construction industry is hindering the delivery of new housing, driving up construction costs and delaying projects.
Falling Inflation and Interest Rate Cuts
With inflation gradually falling within the Reserve Bank’s target range, there is a possibility of several interest rate cuts in 2025, which would improve buyer confidence and increase borrowing capacity.
Robust Rental Market
Record-low vacancy rates and rising rents have led to a rental crisis, making investment properties an appealing option for long-term returns.
A Resilient Australian Economy
Despite global economic challenges, Australia’s economy has shown resilience, bolstered by population growth, low unemployment, and strong consumer spending. Ongoing federal and state government investments in infrastructure further support economic growth and contribute to long-term property market stability.
While challenges such as cost-of-living pressures and high interest rates persist, the inherent strength of the economy provides a positive signal for property investors. Economic stability, particularly job security, instills confidence in homebuyers and investors to make significant financial commitments.
Consumer Confidence and the Property Cycle
Consumer confidence drives property market activity. As inflation decreases and interest rates drop, we can expect a resurgence in buyer and seller confidence. As individuals feel more optimistic about the economic outlook, they are inclined to re-enter the property market, boosting demand and supporting price growth. Historically, changes in consumer confidence signal new phases in the property cycle. The anticipated improvement in sentiment in 2025 could lead to increased market activity, transitioning from “FOBE” (Fear of Buying Early) to “FOMO” (Fear of Missing Out), often resulting in heightened demand.
The return of international interest in Australian property, with foreign investors re entering the market, will further support property values. Collectively, these factors create an environment where property values are likely to remain well-supported, presenting savvy investors with a unique opportunity to acquire quality assets.
With high construction costs, new homes—and particularly apartments—are set to be significantly more expensive to build, resulting in substantial “inbuilt equity” in many housing markets. However, not all properties are equal; understanding where and what to buy is crucial for investment success.
It’s becoming increasingly clear that waiting for interest rates to fall may lead to fierce competition with owner-occupiers for prime properties. Conversely, purchasing properties below replacement cost in a market poised for recovery could yield considerable returns as economic conditions improve and interest rates eventually decline.
While it’s likely that property price growth will slow in 2025 compared to previous years, the silver lining is that if the national outlook for property doesn’t appeal to you, investing in the right property in the right location can outperform the average. This doesn’t mean searching for the next hotspot; rather, it involves acquiring quality properties in areas likely to excel in the long term, such as gentrifying suburbs.
Property offers numerous opportunities to enhance your results through your own time, skills, and knowledge, so you need not settle for mediocrity. Beyond location, you can also add value through refurbishment or redevelopment.
However, given that the cost of living, including elevated interest rates, is likely to continue straining the average Australian’s budget, making property less affordable, many investors are left wondering:
“What will drive property values upward in the future?”
This concern is not new. Following the late 1980s boom, the media was rife with claims that property values could not rise further, and parents worried that their children (today’s Baby Boomers) would never afford homes—a prediction that proved incorrect.
In the early 2000s, another property boom raised similar questions: “What could possibly drive property values any higher?” Following the property boom of 2014-16, media narratives focused on affordability issues and stagnant prices, yet after a lull and some false starts, we experienced a once-in-a-generation property boom in 2020-21.
Australia is vast, with many remote areas where properties remain affordable, but the challenge is that few choose to live there. Generally, most people prefer to reside in the same sought-after locations within major capital cities.
But if prices are high in those areas, what will sustain the value of well-located properties?
I contend that demographics—such as population growth, family formation, and preferences for living locations—along with national wealth, will be the primary long term drivers of our property market, outweighing the short-term fluctuations brought about by interest rates, inflation, or government actions.
If you’re like to discuss investment opportunities in Australia, contact Fundamental Invest today.