House prices will continue on upward path … slowly

A senior economist believes house prices could slow over the next two years because of higher interest rates.

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,” Commonwealth Bank senior economist Trent Saunders said.

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

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,” Saunders said.

By contrast, housing supply in NSW 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 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.

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.

Overall, CommBank expects national dwelling prices to rise by around five per cent this year and three 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.”