Economic and Financial Market Update: House prices - Changing down the gears


  • House prices were up strongly across Australia in 2021;
  • Very low interest rates, strong labour market, and increasing demand for standalone houses at a time of modest new supply were the main factors;
  • Price growth will be lower in coming years, with the possibility they may decline for a period; 
  • Brisbane, Adelaide, Perth and Darwin provide the best value across the capital city housing markets. 

We are in the middle of the biggest global pandemic in a century and house prices have just had their largest annual rise in 30 years (21%).

One factor that is very important for house prices is the level and movement of interest rates. History has shown that most periods of strong house price growth has coincided with a declining cash rate. Right now the discussion about interest rates is very much when they may head higher.

History also suggests a nuanced relationship between rate hikes and house prices. At various times other factors can be more important drivers of the housing market than interest rates. These include household confidence about the jobs market and their own finances, confidence in the outlook for house prices, the availability of finance and the underlying supply and demand conditions.

Actual declines in house prices often coincide around the peak of the cash rate. This makes sense as the peak of the cash rate is when the full bite from higher interest rates is being felt. Financial markets are pricing the peak of the cash rate to be in 2024-5 at around 2-2.25%. I agree with financial markets about the timing of the peak in the cash rate. But as argued last week I think the peak in the cash rate will be above current financial market pricing.

The momentum of house price growth slowed over the final four months of 2021. This makes it likely that growth in 2022 will be comfortably below the pace seen last year. The expectations of slower growth reflects the possibility/likelihood of rising interest rates, weak demand from slow population growth, rising supply of new houses and the potential for some further tightening of bank lending standards. There are risks that house prices may decline sometime for a period around 2024. More generally, past 2022 we are likely to be in for a run of years of less rapid house price growth.

Brisbane led the way in the Big City annual house price growth leader board for 2021. Sydney, Brisbane and Adelaide were all above 20%, with all major cities achieving double-figure growth. Many local government areas (LGA’s) experienced big price rises for standalone houses. Fourteen had over 50% price growth in the year, three had over 100%! There was double-digit price growth in three quarters of all LGA’s. But 28 LGA’s experienced price declines indicating that even during strong periods of nationwide growth house prices can still decline driven by local economics.

Relative to Sydney, the average house price in Hobart is expensive by the standards of the past 40 years. Melbourne and Canberra house prices are about the mid-point of the range they have been relative to Sydney over the past fifty years. Brisbane, Adelaide and Perth appear cheap. Another indicator of affordability is the proportion of income spent on meeting mortgage payments. Sydney is the most expensive by that measure. Melbourne, Hobart and Canberra the next highest. Perth and Darwin the lowest, with Adelaide and Brisbane in between.

Value and affordability both suggest the Brisbane and Adelaide housing prices may rise by more over the next 2-3 years. The same factors suggest that Sydney and Hobart could have the slowest house price growth. Melbourne and Canberra are likely to be somewhere in-between. The Perth and Darwin housing markets currently offer the best value.


To read my full update, click here.


We live in interesting times.


Peter Munckton - Chief Economist