Australia’s housing market is heating up again as rate cuts flow through, but affordability remains stretched, according to Commonwealth Bank (CBA) economists Luke Yeaman and Lucinda Jerogin (pictured left to right).
CBA noted that since the first RBA rate cut in February, national home prices have lifted 3.1%, and the market has outperformed their initial forecasts.
“We had been predicting a modest pickup in 2025 of around 4%. This now looks too conservative, but there are still a range of headwinds,” Yeaman and Jerogin said.
Over the long run, home prices typically track household income growth. But CBA said Australian housing has long outpaced income growth:
“Real home prices have grown by ~3.3%/yr since 1990, compared to real household disposable income growth of ~2.9%/yr,” the CBA economists said, citing lower neutral interest rates and easier credit availability as structural supports.
The result: Australia remains among the least affordable housing markets globally, with the ratio of real median house prices to disposable income at 7.9, according to Cotality.
Markets are now laser-focused on the Reserve Bank (RBA) ahead of its Aug. 11-12 meeting, with brokers widely expecting another rate cut. Deputy governor Andrew Hauser urged attention to the bank’s forecasts, noting inflation has now eased into the 2-3% target band. Many in the mortgage industry, including broker Cara Julian of Brava Finance, said the data “is definitely in,” and RBA will likely act to “help boost the economy.
CBA explained that interest rates are the dominant short-term driver.
“Lower rates reduce mortgage costs and increase the maximum loan size for borrowers. Rate-cutting cycles in Australia typically see national house prices rise by ~10-15%,” the CBA economists said.
Past cycles have been volatile. Between mid-2019 and late 2021, 115 bps of RBA cuts drove prices from a -5.2% annual fall to +24.8% annual growth. Once the RBA hiked rates from May 2022, price growth slumped to -6.2% by January 2023.
Other factors include:
CBA has upgraded its national home price growth forecast to 6% for 2025 (previously 4%), before easing to 4% in 2026.
State-by-state outlook:
“The risk to our forecasts lies to the upside. The housing market is a momentum market and there is always the potential for speculation to take control,” the economists said, adding that further RBA cuts could lift prices faster.
Despite the rate cuts and slight income recovery, mortgage stress remains high:
“Housing affordability remains a significant challenge for home buyers, especially first-home buyers,” CBA said.
They estimate unaffordability peaked at 24.7% of pre-tax income for a dual average full-time household in late 2024. While affordability is expected to improve gradually as incomes rise and rates fall, it will remain stretched by historic standards.
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