Australia home values continue rising despite stretched affordability and renewed inflation concerns.
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| Houses in Sydney, Australia, on January 27, 2025. Photo by Brent Lewin/Bloomberg/Getty Images |
Australian home prices extend gains for a second consecutive month, reinforcing a strong upward trend that has persisted despite mounting affordability pressures, tightening credit conditions, and renewed concerns about inflation. The steady climb in values has surprised even some optimistic analysts, as the imbalance between robust demand and chronically constrained supply continues to shape the country’s housing market. With many regions experiencing rapid increases in property values, policymakers are watching closely to assess the implications for inflation, household borrowing, and the broader economic outlook.
Fresh data from Cotality, the property analytics firm formerly known as CoreLogic Inc., shows that the national Home Value Index rose one percent in November, following a stronger 1.1 percent increase in October. The continued rise underscores a broader pattern in which Australian home prices extend gains across major capital cities, regional markets, and high-demand suburban zones. Perth once again recorded the fastest growth at 2.4 percent, driven by fierce competition for limited listings and persistent population inflows. Sydney saw a 0.5 percent rise, supported by higher-income buyers and ongoing migration, while Melbourne recorded a more modest 0.3 percent increase in what remains a slower, more supply-sensitive market.
The ongoing climb in prices has sparked renewed debate about affordability, inflation, and the direction of monetary policy. Tim Lawless, research director at Cotality, said the latest figures reflect a complex environment in which Australian home prices extend gains even as household budgets face tightening pressure. Lawless noted that record-high values are beginning to collide with “serviceability barriers” that limit the borrowing capacity of potential buyers. With home prices at historic peaks and borrowing power constrained by higher assessment rates, an increasing number of households may soon find themselves unable to enter the market.
Lawless added that the broader sentiment in the property market could weaken if interest rates remain steady for an extended period. While the Reserve Bank of Australia has cut its benchmark rate three times this year, bringing it to 3.6 percent, the lowest level since April 2023, markets remain uncertain about the path ahead. Strong population growth, government incentives for first-home buyers, and resilient employment figures have all combined to support housing demand. Yet supply remains the persistent bottleneck. New home construction has lagged behind demographic needs for years, and the pipeline of new projects has weakened due to high building costs, labour shortages, and reduced developer confidence.
Economists warn that the tight housing supply is now a central driver of inflation in Australia. Housing-related costs, including rents, have been a major contributor to the recent uptick in inflation, raising the possibility that sustained increases may force the RBA to hold rates for longer than anticipated. As Australian home prices extend gains, the central bank faces a delicate balance between supporting economic momentum and preventing inflation from drifting above its target range. The RBA’s upcoming meeting next week, its final decision of the year, is expected to maintain the cash rate at 3.6 percent, but policymakers will be scrutinizing the inflation outlook with increased caution.
For now, financial markets see only a slim chance of a rate hike late next year, though uncertainty remains. Economists are divided, with some expecting one more rate cut, others predicting no movement, and a growing group anticipating the next adjustment could be upward. The accelerating pace at which Australian home prices extend gains is now a defining factor in these evolving forecasts.
Adding to the complexity is a new regulatory shift announced by the Australian Prudential Regulation Authority. With credit growth surging and property prices climbing at a pace that risks overheating, APRA has indicated it will tighten mortgage-lending rules to reduce financial stability risks. The regulator is concerned that rapidly expanding credit volumes, coupled with high loan-to-income ratios, may increase vulnerabilities in the banking sector. Data from recent quarters shows that Australian home loans surged beyond earlier expectations, hitting record levels and prompting calls for more conservative lending standards.
Industry analysts say these regulatory shifts may soften demand at the margins but are unlikely to reshape the core trend in the near term. As long as Australian home prices extend gains, driven by structural supply shortages and strong population growth, credit tightening may only slow, rather than reverse, the momentum. Nonetheless, banks and borrowers are expected to adjust quickly, as the broader housing market begins to feel the effect of heightened scrutiny and more rigorous loan assessments.
Meanwhile, new figures from PropTrack, the data arm of REA Group, show that affordability remains near record lows across most cities. Despite lower borrowing costs following the RBA’s cuts, the increase in property values has outpaced the gains in purchasing power. Angus Moore, senior economist at PropTrack, noted that housing affordability is “likely to remain challenged throughout the year ahead” given the expectation that interest rates will remain on hold for the foreseeable future. Moore emphasized that even slight improvements in borrowing conditions have been offset by the rapid rise in values, leaving many first-home buyers facing significant hurdles to homeownership.
As Australian home prices extend gains across multiple states and territories, policymakers and analysts are debating whether the market is entering a new phase characterized by slower but persistent growth. Some argue that affordability constraints will eventually force prices to level off, particularly if income growth fails to keep pace. Others believe that strong migration, limited land availability, and long-standing supply deficiencies will keep upward pressure on values well into 2026.
The dynamics vary across cities. In Perth, the combination of low stock levels, strong local employment, and comparatively affordable prices relative to other capitals continues to drive rapid acceleration. Sydney’s market, while expensive and highly sensitive to interest rates, remains buoyed by migration and higher-income demand. Melbourne’s slower pace reflects a more cautious market, shaped by higher construction activity relative to population growth and greater diversity in housing supply.
Regional markets have also seen mixed results. Some areas continue to attract buyers seeking affordability and lifestyle benefits, while others have cooled after significant pandemic-era gains. Yet the overall theme remains consistent: Australian home prices extend gains because demand continues to exceed available stock, and construction pipelines remain thin.
Looking ahead, the trajectory of inflation, the RBA’s rate decisions, and regulatory impacts from APRA will all play a decisive role in shaping the housing outlook. Financial stability concerns are likely to remain at the forefront as regulators weigh the trade-off between supporting homeownership and preventing excess borrowing risk.
For now, the data is clear. Despite affordability challenges, despite tighter lending settings, despite concerns about inflation and economic uncertainty, Australian home prices extend gains in a market where demand continues to overpower supply. The coming months will reveal whether this momentum can be sustained or whether affordability constraints begin to place a natural cap on growth.
