'Two-speed’ housing market tipped to slow as higher rates bite

Prices in Australia’s housing market have continued to grow faster than expectations, but higher interest rates are expected to slow price growth over the next two years, according to Commonwealth Bank Senior Economist Trent Saunders.

National dwelling prices rose close to 10 per cent over the past year and are now around 55 per cent higher than pre-COVID levels. Prices for detached houses have risen even more sharply.

“Over the past few years, the Australian housing market has remained much stronger than most people expected,” Saunders said on the latest episode of the CommBank View: Economics and Markets podcast.

“However, the headline figures disguise significant variation across cities, regions and market segments”.

A two‑speed market

Performance across the country has been uneven, with Perth, Brisbane and Adelaide continuing to record strong price growth, while Sydney and Melbourne have lagged.

“What we’ve really seen is a two‑speed housing market,” Saunders said.

Supply versus demand imbalances have been the key driver. In Perth, prices have outpaced the national average by over 40 per cent since the start of the pandemic, while Brisbane prices are around 30 per cent higher.

“In those states, population growth has been much stronger relative to dwelling supply,” he said.

By contrast, housing supply in New South Wales and Victoria has exceeded population growth, easing pressure on prices.

“In Sydney and Melbourne, construction has actually outpaced population growth,” Saunders said. “Those are the cities where prices have come in below the national average.”

Affordability is reshaping demand

Affordability constraints have increasingly influenced buyer behaviour, particularly in Sydney, where demand has been strongest at the lower end of the market.

“There’s been more activity at the more affordable end, where affordability pressures are more binding,” Saunders said.

At the same time, prices in higher-priced segments of the housing market have softened.

Supply still the central challenge

Australia’s affordability constraints ultimately reflect a persistent shortfall in housing supply, Saunders said.

“We’re not building enough housing at the same time that population growth has been strong,” he said.

While ‘demand side’ measures such as the 5% deposit scheme can help some buyers enter the market, longer-term affordability gains will depend on supply-side reform, including planning changes and increased higher density development, he said.

“There’s widespread recognition that supply reform is where the bigger gains will come from,” Saunders said.

However, construction remains well short of targets set under Australia’s National Housing Accord, which aims to deliver 1.2 million new homes over the five years to June 2029.

Slower growth is expected ahead

Overall, CommBank expects national dwelling prices to rise by around 5 per cent this year and 3 per cent in 2027, marking a slowdown from last year.

“The biggest driver is higher interest rates,” Saunders said.

Expectations for population growth to moderate and for investor policy changes will add modest additional pressure.

Despite the slowdown, Saunders believes prices are unlikely to fall nationally.

“For markets like Perth, Brisbane and Adelaide, fundamentals remain strong,” he said. “We expect growth to slow, not reverse.”