Housing market to slow in 2025: KPMG

Supply shortages and labour constraints expected to impact construction and affordability

Housing market to slow in 2025: KPMG

Australia’s housing market is expected to see slower price growth in 2025, with supply constraints and labour shortages continuing to challenge the construction industry, according to the latest KPMG Residential Property Market Outlook.

While demand remains strong, economic conditions and ongoing bottlenecks present obstacles for builders and contractors, the report highlighted.

National house prices grew by 5.1% in 2024, but KPMG forecasts a slowdown to 3.3% in 2025 before a rebound to 6% in 2026. Unit prices are expected to rise at a faster rate than houses as affordability concerns push buyers toward lower-cost options.

The supply-demand imbalance remains a pressing issue, the KPMG report noted, with a projected shortfall of 95,000 dwellings between 2023 and 2026. Population growth continues to outpace new housing completions, keeping affordability under pressure.

Building approvals showed signs of recovery in late 2024, with new house approvals rising by 23% and unit approvals increasing by 18%. However, construction delays persist due to labour shortages and high material costs. Wage growth in construction slowed to 3.5% in Q3 2024 from 4.2% earlier in the year, but shortages of skilled tradespeople, particularly in electrical services, remain a concern.

The Reserve Bank of Australia is expected to cut interest rates from mid-2025, which could improve buyer confidence. Investor sentiment is already strengthening, particularly in Brisbane and Perth. Perth recorded the highest house price growth in 2024 at 17.5%. Meanwhile, the time required to build a house remains 50% longer than pre-pandemic levels, and first-home buyers need to allocate 54.4% of their income to mortgage repayments.

Despite persistent affordability challenges, easing construction costs and a stable labour market could create more favourable conditions by 2026. Builders who can navigate short-term supply chain and labour issues may be well-positioned for long-term growth.

“While 2024 was a year of high interest rates and inflation and subdued consumer sentiment, the housing market withstood all those factors and still provided strong price growth, due to demand outstripping supply,” said KPMG chief economist Brendan Rynne (pictured above). “Even the much-anticipated ‘fixed-rate cliff' – the transition of mortgage holders off lower fixed rates to higher variable rates – had only had a mild impact and households generally coped well with the rate rises, due to a robust labour market and Australia’s historic low unemployment rate.

“We are starting to see building approvals moving in the right direction to meet the current supply shortages, which was driven largely by robust population growth. Construction costs are also starting to moderate. However, this still means only a limited translation of increased approvals into actual housing completions in 2025 and 2026 due to the time lag inherent in the process from approval to completion and the lack of feasibility. ​

“Despite affordability and availability issues and a delayed interest rate cut, increased investor sentiment, and anticipated relaxed lending conditions will help support modest price growth in 2025, and then stronger growth next year.”

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