Why price growth is still strong in a cost of living crisis

The Australian housing market finished 2025 exceptionally strong. National dwelling prices ended the year at $959,000, delivering around 12 per cent growth over the year. That level of performance is rare. To put 2025 in context, you have to go back to the COVID housing boom to find a year this strong, and outside that once-in-a-generation period, national price growth has not reached these levels at any point in the past 20 years of available data.

What makes this outcome even more striking is the way the year unfolded. Price growth strengthened through the second half of 2025. Growth was also highly uneven. More affordable markets recorded the strongest gains, while the most expensive cities saw slower conditions. Perth, Brisbane and Adelaide all delivered annual growth well above the national average, as did many regional markets. Sydney and Melbourne still recorded positive annual growth, but momentum softened toward year end, with prices slipping slightly on a monthly basis. This divergence is a key feature of the current cycle.

Strong house price growth appears hard to reconcile with ongoing cost of living pressures. Households setting prices are not the same households experiencing the most cost of living stress, and supply scarcity continues to dominate at the margin, even as affordability worsens overall.

Cost of living pressures are widespread, but they are not evenly distributed. Some households are struggling with cost of living, while others are constrained mainly by deposit requirements, and others again are relatively insulated because they already own property and hold significant equity. Housing markets are driven by the marginal buyer, not the average household, and that marginal buyer today is more likely to be higher income, dual-earner, or equity-rich. Or helped by Government incentives.

One of the defining features of this cycle is that price growth is being driven from the lower and middle segments of the market, not the top end. This is where homes remain more attainable, even with higher interest rates, and it is also where government support is most concentrated.

First home buyer incentives, deposit guarantees, shared-equity schemes and stamp duty concessions are all targeted at the cheaper end of the market. These policies do not increase how much households can comfortably repay each month, but they do increase the number of households that are able to transact. As a result, demand at the entry level has remained resilient and, in many markets, competitive.

While cost of living pressures are real, they are impacting some people far more than others. Many active buyers are simply not the most financially stressed households. Those with stable incomes, secure employment and existing equity have been better able to absorb higher costs by adjusting spending elsewhere. This uneven impact helps explain why prices can continue to rise even while confidence surveys and sentiment remain subdued.

Employment conditions remain an important underpinning of housing demand. Even with higher mortgage repayments, households are far more likely to continue buying and holding property when they feel secure in their jobs. Low unemployment has helped maintain confidence that incomes will continue, even if budgets feel tight. Historically, housing markets weaken most sharply when job security deteriorates, not when living costs rise on their own.

Another critical factor is supply. Construction costs remain elevated and feasibility challenges continue to limit new housing delivery. In many markets, the cost of replacing an existing home now exceeds the value of that home, particularly once land, materials and labour are taken into account. When replacement costs rise faster than prices, existing housing stock becomes more valuable by comparison. This dynamic alone places upward pressure on prices and reduces the likelihood of meaningful price falls.

Looking ahead, prices are still likely to rise, but not as strongly as they did in 2025. Interest rates may rise again which would have an obvious impact, but even if they do not, serviceability is expected to become more challenging. Lending assessments remain conservative, and borrowers are tested at interest rates well above those they actually pay. This continues to cap borrowing capacity and limits how far prices can be pushed higher.

There is also an external risk to consider. Ongoing challenges to US central bank independence have the potential to lift global borrowing costs. If global funding becomes more expensive, Australian borrowing costs can rise independently of decisions made by the Reserve Bank. That would further constrain serviceability and dampen price momentum.