While the housing market is the largest single asset class in the country, valued at over $11 trillion, it is heavily influenced by broader economic trends.

Here I look at the seven key economic indicators that will influence the housing market in 2025.

1. Inflation

While headline inflation has reduced significantly, this is largely a function of temporary relief to some household costs which ease inflation when they are available but add to inflation when they are removed.

The RBA has repeatedly stated that they are focusing on underlying inflation which remains too high and that they don’t expect to be sustainably within the 2%-3% target range until 2025.

Forecasting inflation is an inexact science (like any forecasting), but more persistent inflation for longer increases household costs and is likely to see interest rates maintained at higher levels for longer.

In turn, this also reduces borrowing capacities for households and impacts on housing affordability.

2. Interest rates

Inflation is intrinsically linked with interest rates because if progress is not made in bringing inflation down, interest rates will remain higher for longer.

Throughout most of 2024, people had been expecting that the Reserve Bank (RBA) would cut interest rates by 25 basis points late in 2024 (possibly as early as September) and then follow that cut with three to four 25 basis point cuts in 2025.

Inflation, interest rates and other economic indicators will influence Australia's housing market in 2025. Picture: Getty

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As we sit here today, there haven't been any interest rate cuts in 2024 and the market is currently only anticipating three 25 basis point cuts in 2025, the first in April, second in July and third in December.

Households struggling with the increasing cost of living and high mortgage repayments will be facing higher costs for longer with less interest rate relief, and that relief occurring much later than expected.

This has the potential to weigh on mortgage holders, potentially forcing some to have to sell while others won’t be able to move into a more appropriate property, or to purchase a first home until interest rates reduce and borrowing capacities increase.

3. Labour market

The labour market remains strong with job creation strong, employment participation close to record-highs and the unemployment rate sitting at 3.9% and lower over recent months.

The RBA estimates that for inflation to return sustainably to target the unemployment rate will need to increase to around 4.5%, but to date there is no sign that the unemployment rate is heading to that level. We should note that even if it reaches 4.5%, that unemployment rate is much lower than it was during the period between the Global Financial Crisis and the pandemic.

If more people are employed and working in a job with sufficient hours, as they are currently, then they may be more confident about making high value purchases such as a residential property.

The tight labour market also means that people who are unhappy in their job have a greater ability to shift to a new job and potentially one that pays a higher salary.

4. Population growth and migration

Population growth fueled by net overseas migration has been exceptionally strong since Australia’s international borders reopened in 2022. Over the 12 months to June 2024, the national population increased by 2.1% or 552,032 persons.

While the rate of population growth has slowed, the slowing has been moderate and the population continues to grow at a much faster pace than the long-term average of 1.4% annually.

Heightened population growth creates more demand for housing and infrastructure. While the federal government has talked about slowing migration, it remains well above average levels and for the sake of the housing market it will be important to see how population growth progresses over the coming year.

5. Mortgage lending

The latest data shows that lending is continuing to lift, both in terms of overall outstanding credit and new housing finance commitments. The increase in demand for finance is contributing to housing demand and pushing prices higher.

Mortgage lending continues to rise, the latest data shows. Picture: Getty

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It should be noted that monthly data has indicated that growth is slowing and this is likely a response to higher interest rates for longer and the deteriorating housing affordability.

Mortgage lending trends are likely to be a key determinant of the direction of housing prices in 2025.

6. Housing construction costs

Over the year to September 2024, producer housing material costs have increased by 1.4% however, since the beginning of the pandemic they are 34.3% higher. Output costs - the cost of construction - has increased by 4.4% over the year for houses and by 6.9% for other residential (units), with increases of 43% and 26.2%, respectively, since the onset of the pandemic.

While these costs are now escalating at a slower pace, there is little prospect of these prices being reduced. As a result, the cost of construction is higher and that pushes up the purchase cost of new housing.

Rising housing material costs have contributed to the cost of new homes. Picture: Getty

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For new development, this means there is a wide premium for new properties compared to existing homes which is seeing many buyers preference older properties. It also results in most new unit developments targeting a premium buyer while new housing is at a premium and purchasers are having to rationalise on lot and building size.

7. New housing supply

Under the Federal Government’s Housing Accord, they have a stated goal of building 1.2 million new homes over the five financial years to 2028-29. This is a stretch goal and proving extremely challenging given high interest rates, elevated construction costs and extreme competition for construction trades from both residential and other construction work.

The 1.2 million new homes goal equates to 240,000 new dwelling completions a year for five consecutive years - a level of construction that has never been achieved before.

Most new housing is only built once sufficient presales are achieved to access finance for construction. The higher cost of new properties relative to existing ones is making the presale environment more challenging leading to a lower volume of new housing being delivered. Encouragingly, dwelling approvals have lifted from their recent low but they are still significantly below the level we need to be delivering 240,000 new homes each year.