7 key economic forces influencing Australia’s housing market in 2025

While the housing market is the largest single asset class in the country, valued at over $11 trillion, it is heavily influenced by broader economic trends.

Here I look at the seven key economic indicators that will influence the housing market in 2025.

1. Inflation

While headline inflation has reduced significantly, this is largely a function of temporary relief to some household costs which ease inflation when they are available but add to inflation when they are removed.

The RBA has repeatedly stated that they are focusing on underlying inflation which remains too high and that they don’t expect to be sustainably within the 2%-3% target range until 2025.

Forecasting inflation is an inexact science (like any forecasting), but more persistent inflation for longer increases household costs and is likely to see interest rates maintained at higher levels for longer.

In turn, this also reduces borrowing capacities for households and impacts on housing affordability.

2. Interest rates

Inflation is intrinsically linked with interest rates because if progress is not made in bringing inflation down, interest rates will remain higher for longer.

Throughout most of 2024, people had been expecting that the Reserve Bank (RBA) would cut interest rates by 25 basis points late in 2024 (possibly as early as September) and then follow that cut with three to four 25 basis point cuts in 2025.

As we sit here today, there haven’t been any interest rate cuts in 2024 and the market is currently only anticipating three 25 basis point cuts in 2025, the first in April, second in July and third in December.

Households struggling with the increasing cost of living and high mortgage repayments will be facing higher costs for longer with less interest rate relief, and that relief occurring much later than expected.

This has the potential to weigh on mortgage holders, potentially forcing some to have to sell while others won’t be able to move into a more appropriate property, or to purchase a first home until interest rates reduce and borrowing capacities increase.

Reference:

https://www.realestate.com.au/insights/7-key-economic-forces-influencing-australias-housing-market-in-2025/