Defying gravity: Why house prices aren’t coming down

Not even high interest rates, cost of living pressures, exceptionally low consumer sentiment and affordability constraints have managed to dampen house prices. They simply refuse to fall.

Would-be buyers are now faced with the risk of staying on the sidelines. When interest rates begin to fall, house prices that are now stable may begin to take off.

Residential housing is a particularly stubborn or tenacious asset that regularly defies the best economists’ predictions – in part because it’s impossible to quantify the importance of Australians’ desire for homeownership.

Strong demand for housing keeps prices from falling.
Strong demand for housing keeps prices from falling.Credit: Brent Lewin

The massive increase in the cost of renting is also herding people into the queues to buy property.

The housing market has left most economists wrong-footed since the pandemic. Most recently they had been forecasting that Australians facing the mortgage cliff (as they rolled off their cheap fixed interest rates to higher variable rates) last year would generate a big fall in property prices.

The opposite happened.

Not only have most borrowers been able to navigate the interest rate cliff, but an oversized boost to immigration dried up the supply of housing.

According to National Australia Bank, the market share of foreign buyers in new housing climbed to a 6.5-year high in the December quarter, and has now risen almost five-fold since the COVID lows in mid-2021.

In 2024, the two opposing forces – constrained supply and high interest rates – appear to have cancelled each other out, and house prices have stabilised.


The CoreLogic data set for January on price movements shows particular capital cities and regions have performed differently, but the combined national market is ahead 0.4 per cent again, having moved up 0.3 per cent in December.

Sydney prices grew 0.2 per cent, while Melbourne values fell a very modest 0.1 per cent in January.

Economists who had previously been bearish on property prices are now having to restate projections and introduce the possibility or even likelihood that prices will go up again this year.

Most are expecting to see an interest rate reprieve hit Australians in the second half of the year.

And as inflation falls and wages begin to catch up, the cost-of-living crisis will begin to ease – all of which will serve to push property prices higher.

The stage 3 tax cuts will also provide some help to affordability.

AMP’s chief economist Shane Oliver says we should expect a renewed upswing in house prices from later this year in response to lower mortgage rates. “Falling inflation adds to confidence that rates will be falling from mid-year,” he says.

But he sits in the forecasters’ camp that also sees downside risks to prices.

“The big negative influence on the property market remains poor affordability and high mortgage stress,” Oliver says. “For years, property prices were supported by ever lower interest rates, but due to the rebound in interest rates from May 2022 and high home-price-to-income ratios, there is now a wide divergence between buyers’ capacity to pay for a property and current home prices – which we estimate to be around 28 per cent.”

Both NAB and Commonwealth Bank economists are forecasting residential property prices to rise 5 per cent this year.

“The demand/supply imbalance is likely to remain a key support in the short term, while expected rate cuts in late 2024 will provide additional support in 2025,” NAB’s chief economist Alan Oster says.

But as any economist would tell you, employment holds the key to house prices. While it remains strong and people can afford to continue paying their mortgage, the property market is fortified.

If there is a marked increase in unemployment, all bets are off.

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