Sydney home prices are expected to fall by $20,000-$80,000 next year as affordability challenges and delays in widely anticipated interest rate cuts drag the property market.

SQM Research’s latest Housing Boom and Bust report, which has a track record of correctly forecasting price movements, indicated city prices were on course to fall between 1-5 per cent over 2025.

This kind of drop would scrub as much as $80,000 from the average value of houses given prices were already at extreme highs, with the median value of houses currently at about $1.65m.

SQM Research’s forecast is based on an expectation of slowing inflation, below trend economic growth and interest rate cuts of between 0.25-0.50 per cent.

It comes as two of Australia’s big four banks last week changed their forecasts of when they tipped the Reserve Bank to finally adjust rates, moving the expected date from February to May.

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Auction clearance rates have been dropping this spring. Picture: Richard Walker

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NAB and Westpac are forecasting two successive cash rate cuts to come in May and June, with Westpac expecting the cash rate to be at 3.35 by December 2025, down from 4.35 per cent currently.

ANZ and Commonwealth Bank have yet to revise their forecasts of a first rate cut in February.

SQM Research director Louis Christopher said housing demand would be subdued in Sydney, despite strong population growth and a shortage of housing, until banks dropped their lending rates.

Sydney’s market has already been slowing for much of the spring selling season, with prices falling in regions such as the inner west and parts of the eastern suburbs. About 50 per cent of city suburbs recorded a fall in prices over the three months to October, PropTrack reported.

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Sales results have been lacklustre outside of a few standout listings and sales within more affordable suburbs.

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Part of the reason for the falls was an increase in housing stock, but there were also signs the economy was getting weaker and prospective buyers were becoming more hesitant, Mr Christopher said.

He pointed to lacklustre economic growth over 2024 and how the Australian economy grew at a slower rate than population increase.

Mr Christopher said that this, coupled with steep rises in the cost of living, meant that many households had gone backwards financially and weren’t in a position to plough more money into housing.

Prices would have dropped by bigger margins than recorded this year if it weren’t for explosive population growth and construction sector issues ensuring a shortage of housing, Mr Christopher said.

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September and October had the biggest Sydney listings increases in over a decade. Picture: Newswire /Gaye Gerard

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“Our two largest capital cities (Sydney and Melbourne), along with Canberra and Hobart, will start 2025 off in the red. Indeed, we are currently recording dwelling price falls in each of these cities,” he said.

“Current interest rate settings are biting the community more in these cities which on our measurements, are in overvalued territory or are experiencing slower economic growth.”

This situation would turnaround once buyers got a borrowing capacity boost from an interest-rate cut.

“Once interest rate cuts do occur, we are expecting a speedy bounce in demand (in) Sydney,” Mr Christopher said.

“This may well mean there is a good window for buyers at this time … (if) rate cuts do not occur in 2025, it is unlikely a recovery will occur in Sydney and Melbourne at any time next year.”

SQM Research director Louis Christopher.

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Adrian Tsavalas, the founder of real estate group Adrian William, said this year’s spring had offered the best buying conditions since 2022 – when rates were first cut.

Home sales had typically attracted four to five interested buyers over the winter, but this dropped to one to zero in spring as listing volumes rose, while buyer demand remained unchanged.

“Home seekers had a wealth of choice and didn’t make offers unless they saw value,” he said.