What do 2025 global housing market trends mean for next year?

Transcript:  

Dr. Selma Hepp:

It's not like by next year our housing markets are going to rebalanced or even into 2027. It's happening so painfully, slowly and gradually that I have to emphasize that work gradually.

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Eliza Owen:

It's a word I use a lot, but I think unaffordable. We've long had this issue in Australia, but I've never seen this kind of separation between prices and incomes.

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Maiclaire Bolton Smith:

Welcome to Beyond the Buildings by Cotality. I am your host Maiclaire Bolton Smith, and I'm just as curious as you're about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle and look beyond the obvious With every conversation we illuminate what is possible. Today's our final episode of season five, so we're going to take a look back at what happened in property this year. Well, so much happens every year in the property market. This year seems to have been exceptionally busy from stubbornly high interest rates to persistent supply challenges 2025 certainly kept everyone on their toes, but we want to add in a global perspective, how did the US market compare to somewhere else in the world like Australia? Well, that's what we're going to find out. These two housing markets are global powerhouses, but they're actually very different. While the US saw home price growth cool off and even decline in some places, Australian cities reported higher price growth even as interest rates continue to climb. But the story of property in 2025 goes much deeper. We just have to dig into the data. So today we're going global to recap the year's biggest trends in housing and what might be coming in 2026. So for our chat today, we welcome back Cotality's Chief Economist Selma Hepp, as well as first time guest Head of Research at Cotality Australia, Eliza Owen. Selma, and Eliza, welcome to Beyond the Buildings.

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Dr. Selma Hepp:

Thank you so much for having us.

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Eliza Owen:

Great to be here. Thank you.

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Erika Stanley:

Before we get too far into this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online, find us using the handle @Cotality on all our social media channels. But now let's get back to today's show.

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Maiclaire Bolton Smith:

I am really excited about this one today. So, okay, so this really is a tale of two countries. So Selma, let's just start with you. Let's just start with interest rates. So looking back, what was really the single most impactful rate decision made by the Fed this year and ultimately, how did it impact the housing market here in the US?

Dr. Selma Hepp:

Looking the September, 2025 rate cut does stand out as a most consequential move by the Federal Reserve. It was the first rate cut for 2025 and the federal lower the federal funds rate by 25 basis points. And so that brought it to the target range of four to four and a quarter percent. And the thing about it is it was a very modest 25 basis point cut. It was significantly powerful in a way that it marked the beginning of many interpreted as a pivoting towards easing. So essentially facing cooling labor market and persistently elevated inflation. But that was moderating. And so the two things that came out of that Fed move was that it did boost buyer sentiment. Mortgage rates didn't fall as much as many were hoping for, but it was providing a psychological shift that things are moving towards more affordable housing market. And it also sort of stabilized expectations, right? So housing market has been a holding pattern for a while and so many buyers and sellers were sitting on the sideline feeling uncertain. And so that September rate cut offer the signal that the Fed was willing to support a broader economy and that helped reduce volatility in essence in the housing activity.

Maiclaire Bolton Smith:

Okay. Now Eliza, the Reserve Bank of Australia also inflation was not unique to us. You also wrestled down there as well. How did any rate movements that you had influenced buyer confidence in Australia? Was it different than what we saw here in the us?

Eliza Owen:

Yeah, it was quite different. In fact, the whole approach to tackling inflation in Australia has been different. So you nailed it. Our federal Reserve is called the Reserve Bank of Australia, and they had this whole thing about keeping the low COVID rate settings for a little bit longer to try and preserve job gains in the economy. So in 2022, they didn't hike quite as early as the US and they didn't go nearly as aggressive. So we got to a peak cash rate of 4.35%, but it was held for longer because we found that inflation did prove to be quite sticky. So it wasn't until this year that we started to get rate cuts. We got the first one in February, then again in May and August. And that, as you can expect, has been a major boost for the Australian housing market, which has been hitting fresh record highs every month.

We're up about 6% year to date, and the month of October we had a growth rate of 1.1%, which is the biggest that we've seen so far through the cycle. What I will say though is the issue we are running into now is that inflation has re-accelerated for the September quarter. So that means that while we've had these three rate cuts in 2025, further rate cuts seem off the table for the foreseeable future. We have a very tight labor market, our unemployment rate is just 4.3%, and with inflation reaccelerating, I think at the very least that stalled cash rate will probably take a little bit of momentum out of the housing market in the short term.

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Maiclaire Bolton Smith:

Wow. Well, this is why we wanted to really have the global perspective is see that this really is a tale of two countries and there really are two different scenarios playing out here across the two different countries. So I guess sma, let's go back to you, interest rates clearly have an impact on housing costs, but there's really more to affordability than just interest rates and things like you and I have talked about before, debt to income ratios as well as the proportion of income that somebody is spending on their mortgage. So with all of that in mind, what do you think the average home buyer here in the US is thinking heading into the new year at

Dr. Selma Hepp:

This point? As you said, mortgage rates have been elevated and there is anticipation of lower mortgage rates, and I think that's providing some cautious optimism for buyers. But what we have seen in the economy is when we refer to K shaped economy as economists, we are seeing widening inequality. And that's both in terms of consumer spending, income, wages, wealth in particular, and then as well access to home ownership. So when we think about affordability going into 2026, it's not likely going to change significantly. It is really low right now and we'll see some improvements as mortgage rates come down, as home prices in particular continue to increase that slower pace than incomes and inflation. So you have real home prices declining and you have more inventory, which helps the picture of access when we think about access. And so I think it's a market that's again, cautiously improving, but there are issues along the way.

And so I mentioned widening inequality in terms of the access, but we also have market that continues to be very bifurcated, and we talked a lot about that throughout this year, how some markets are, because the wage growth and job labor market has been stronger, continue to see much more significant increases in home prices. And on the flip side, you have markets that are now in this very uncertain situation because demand has slowed in migration to those markets, has slowed, and those markets depended on migration of those higher income households. And with now lower income household, relatively more lower income households and a lot more inventory, the ground is unstable, if I can put it that way in those markets.

Maiclaire Bolton Smith:

Interesting, interesting. So Eliza, what about in Australia? How's 2026 looking for the average buyer?

Eliza Owen:

Well, yeah, I think even though our market cycles are at different points, it sounds like some of you are talking about a market that could see a bit of a boost from the recent interest rate cut, whereas I think in Australia we're probably more at the peak of a very strong cycle that could actually start to ease off as we get a bit of a stall in interest rates. But the issue is still the same, this issue of a lack of affordability that is seeing property purchases more concentrated across high income households and people that tend to come from wealthier backgrounds as well. If you are going off income alone, if you're assuming things like a 20% deposit, 30 year loan term, we haven't got the 50 year yet, I know that's being talked about over there, but 20% deposit, 30 year loan term average mortgage rate for an owner occupier in Australia is about five and a half percent.

And given their income growth over the course of the year and affordable purchase price is about $580,000, the actual median dwelling value in Australia is closer to $880,000. So there's a big gap between where incomes and savings are and where actual property prices are. So affordability continues to be the pressing theme. We recently saw the expansion of a first home buyer incentive, and I think that that will provide a temporary boost to first home buyers, but really it's those with wealth and equity who are more able to play. I think that will also somewhat limit turnover and price growth as well. Turnover rate is not looking too bad in Australia, about 5.1% of stocks sold in the past 12 months, but I think that could growth in the turnover rate growth in property prices could definitely be limited in 2026.

Maiclaire Bolton Smith:

Eliza, do you think that is impacting the number of people that are becoming first time home buyers? Do you think that you are maybe seeing or going to see more people remain as renters and maybe even move you to a nation that's dominated by rental income?

Eliza Owen:

Yeah, this is a great question. I mean, we have seen a steady decline in Australia's home ownership rate, which is still quite high. In the mid nineties it was 74%. It's come down to about 66%, and that is a symptom of a lack of affordability and home values rising faster than incomes.

And while the pandemic has kind of supercharged home values, I can only really see the home ownership rate continuing to decline long term. We haven't been a nation of renters before, so we traditionally have individual privately owned investment properties. We don't have the institutional landlords here, but we've had to play a bit of catch up in renter rights as a result making reforms so that we can accommodate older Australians who don't end up owning their own home in the rental market for longer. And there's definitely been a bit of a pickup that I've seen in the past couple of years of conversations with big institutional investors saying, how do we get into this market? How do we make build to rent work in Australia? So there's definitely some structural change that's coming from that lack of affordability and decline in the home ownership rate.

Maiclaire Bolton Smith:

Thanks for that, Eliza. Selma back in the US renting is also popular and you and I as well as other members of your team have talked about rentals a lot on this podcast over the year as well. But even for homeowners, things are challenging. If we look at, we keep talking about inventory constantly. Where did we see the most significant bottlenecks in the housing supply this year? Were there any regional or local markets that really stuck out or this ongoing bottleneck of housing supply? Where are the areas that are the biggest concern?

Dr. Selma Hepp:

So one interesting development in 2025, unlike the prior two years, is that we have seen improvements in inventory. And so finally on a year over year basis, inventory was consistently rising and the deficit compared to pre pandemic was shrinking. Unfortunately, we still remain nationally at levels that are below pre pandemic levels, and in some markets that shortage is as much as 50% to 60% under supply compared to pre pandemic, meaning that yes, maybe there's been some slight improvements, but still inventory remains at historical loss. And again, that story is very, very regional. And I started calling it like a K-shaped housing market because when you look at a map, the upper part of the us, the northeast and Midwest is where home prices continue to be solid and those are the areas that haven't seen significant increases in inventory, which is supporting that home price appreciation.

And then on the flip side, you have the other part of K, the lower leg of K, which is illustrating what's happening in south and southeast where there's been a lot of inventory growth. In fact, in some markets inventory is way above 2017 through 2019 levels, but because of the slowdown in combination to that inventory growth and slowdown in demand, home prices in those markets are falling. So one thing that is an interesting takeaway at this point is that really we're trying to resolve this housing affordability challenge through a number of areas policies, but what really works well is when you have more inventory, when you build more and there's more inventory that suppresses the rate of home price appreciation and it helps improve affordability.

Maiclaire Bolton Smith:

I guess Selma too. The other thing that comes to mind is it's not just about low supply. One of the reasons that we haven't seen a lot of turnover of people transactions within the housing market is something that you and I and Molly from your team talk about a lot in the last couple years is the rate lock effect. And that how so many people refi during the pandemic, and there's a lot of people that have interest rates less than 4%, and they just don't want to leave those low rates and move to a higher interest rate. And I know you and I have talked about that you and I are two people that did. We both bought homes during the pandemic after interest rates started going up again. But are we still seeing that as that impact about another number of people not wanting to leave their low interest rates?

Dr. Selma Hepp:

Absolutely. I mean, even when you look at historically when you take into account all of this new construction in the south and southeast and Mountain West and existing inventory online, the adjusted for population, the levels of inventory adjusted for population still remain at some of the lowest in history of the data series that we have. So yes, the lockin effect is real and continues, and I think that's going to take a much longer time to unfold itself, to throw out in some way. And it's going to be mostly what happens is there is a life change, and that's when people start making that decisions, that decision to leave, job a move, or they want to have a child or they want to go live closer to the family. So that does contribute to low transaction volume and it's just going to be a matter of time. It's going to very slowly and gradually unfreeze itself, I guess, in a sense.

Maiclaire Bolton Smith:

Sure. Yeah, no, that makes absolute sense. And I mean am the perfect example of that is that's why I moved from a very low interest rate to a not so low interest rate was because I needed a bigger home and was able to, but that's something a lot of people are not ready to move away from their lower interest rates until they have that life need, maybe you could say. Yeah. Eliza, I want to shift over to you. Let's talk about housing finance. Were there any major changes in lending standards or maybe the prevalence of variable rate mortgages in Australia this year and how did that affect the market there?

Eliza Owen:

Yeah, so because interest rates were falling in Australia in 2025, variable rates were more popular. They were priced better than longer term fixed rates. But for the Australian mortgage market in general, variable rates are the thing here. They make up the vast majority of new and outstanding credit. At the end of 2024, only 3% of outstanding housing credit was fixed. And that's because in Australia, you don't have the government sponsored enterprises. There is no Aussie Mac. So our banks carry a lot of their own risk themselves, and that means that they tend to shy away from products that expose them to potentially risky lending or a lack of profit, like long-term fixed rates or longer loan terms. It's not something we would expect to see in Australia. The past year here, the main concern for us has been the rise in investment lending. So the share of new mortgage finance secured for investment property purchases was 42% of overall housing loans secured. So that's a historically high level. And the last time we saw it around these levels that actually did trigger intervention from our regulator to basically slow the growth of investment lending to put a cap on products that were popular with investors and that could have, if they do that, again, there's nothing to say they will do that again, but if they do, the last time it happened, it had a strong impact on housing prices. You limit access to credit, you limit price growth. So that's something we'll be looking out for in 2026.

Maiclaire Bolton Smith:

Yeah, interesting. Interesting. Selma, what about here in the US? I mean we've kind of alluded to it already. Eliza mentioned that there's this talk of a 50 year mortgage potentially coming here in the us. Was there anything big news this year in terms of housing finance that was announced this year in the US?

Dr. Selma Hepp:

The 50 year mortgage was sort of a big one in the sense that it gathered a lot of reactions from both economists and industry experts. The idea is this, you have very low affordability, and so you stretch a loan for a longer term to reduce the monthly payment and make home ownership more accessible. The issue is that it's a Band-Aid, right? It's a Band-Aid, and it doesn't really address the cost issue of unaffordability, which is that we have very limited housing supply, high cost of land, we have restrictive zoning. It costs over $400,000 to just get a land ready in California to build a house. That's just regulatory meeting regulatory requirements. And so the other thing is in the US that we have is a lot of our wealth, particularly for those maybe that don't participate in the equity market, comes from housing wealth. It's the wealth we built in our home.

And when you take into account this 50 year mortgage, it takes a significantly longer time to accumulate equity and only really happens much later with your 30, 40 or into 50th year. And so you don't have that same maybe financial cushion that allows you to wetter out some cash strap situations and sort. And that's not the point of home ownership in the US in the American dream. So the drawbacks are significant. So what I would say is we welcome innovation, we welcome financial innovation, and we want that, but it has to be paired with structural reform. So we have to think about how to boost housing production that allows for more affordable new housing, whether that be through stream permitting, expanding access to affordable financing solutions that also allow people to build equity. And so it is not one way of addressing housing affordability challenge in the US. There's so many ways in which we need to approach this.

Maiclaire Bolton Smith:

Yeah, I think I love the way you just said that Selma, because it really is, there's multiple things that are impacting the situation that we're in right now. So something might seem like a good solution, but when you actually look at it, it maybe won't be as helpful as you may think it is on the surface because of that whole building wealth, which is a major part of homeownership.

Dr. Selma Hepp:

Yeah, and can I actually add another thing? What we've experienced over the last couple of decades coming out of great financial crisis that every time we boosted the demand amid low supply is that we just pushed home prices higher. So you're boosting demand by lowering mortgage payment. And again, even that lower mortgage payment is not significantly lower because mortgage rates for those 50 year mortgages are going to be much higher. So maybe you're saving low single digits in terms of your monthly mortgage payment, but at the same time, what you're doing is those savings get capitalized in home prices, so you end up with higher home prices. Anyways,

Erika Stanley:

It's that time again, Cotality just dropped new numbers about what's happening in the housing market. Here's what you need to know. Housing fragility ripples into the wider economy and left unchecked this strain could trigger a housing shock with echoes of the last financial crisis. Only this time, the fault line runs through insurance. Homes across the country are facing an environment they were never built to withstand. When insurance becomes unattainable, lenders are left with fewer qualified borrowers. That then weakens demand, which threatens the $29 trillion in wealth created since 2012, nor is the current fix a long-term fix. According to Cotality, 12% of today's housing stock has a very high risk of damage from natural disasters Without adaptation to the changing environment, that number jumps to 20%. Rebuilding all of these structures would cost $7.2 trillion, a significantly larger cost than the hundreds of billions of dollars it would take to integrate resilience into the property market. To learn more about how resilience can reshape the foundations of property, read our latest insights article. The link is in the show notes, and that's the sip. See you next time,

Maiclaire Bolton Smith:

Selma. Eliza, you know, I love to end these podcasts with, let's look into your crystal balls. So pull out your crystal balls. If you had to each give one word to describe the housing market outlook for the first half of next year, what would it be and why? So Selma, let's start with you. For the US,

Dr. Selma Hepp:

Yes. I think, like I said before, whenever I was asked for one word to explain something in one word, I'm not a one word person, so I need multiple words to explain things, but in this case, this is a little bit more complicated. So I would say gradual rebalancing and the gradual is important here because it's happening so slowly. It's not like by next year our housing markets are going to rebalanced or even into 2027. It's happening so painfully slowly and gradually that I have to emphasize that word gradually. And couple things that are important is that mortgage rates are going to remain elevated. We know that at least in the US, we are not likely to be in a 5% territory anytime soon. We talked about inventory, we talked about affordability challenge, and the last thing is buyers and sellers are so cautious and so many are waiting for something more clearer in order to make that decision to move forward.

Maiclaire Bolton Smith:

No, understand that. Eliza, what about in Australia?

Eliza Owen:

It's a word I use a lot, but I think unaffordable, we've long had this issue in Australia, but I've never seen this kind of separation between prices and incomes and the things that kept the housing market going in 2025, the things that have kept it going up. Yes, we have the Undersupply issue, the inventory issue, the construction issue. We also, funnily enough, have still relatively high levels of net overseas migration supporting demand, but the big thing that kept prices rising in 2025 with the interest rate cuts, and that's on hold for now. So I think that lack of affordability is going to butt up against the kind of stall in interest rates, and that might not be enough to bring the mighty Aussie market down, but I think at the very least, it'll take some heat out of the growth rate and possibly sales volumes.

Maiclaire Bolton Smith:

Well, we will be watching, and thank you both Eliza and Selma for joining me today on Beyond the Buildings by Cotality.

Dr. Selma Hepp:

Thank you so much for having us Maiclaire.

Eliza Owen:

Thank you.

Maiclaire Bolton Smith:

Okay, and thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jessi Devenyns, editor and sound engineer Romie Aromin, our facts guru, Erika Stanley and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another conversation that illuminates the ideas that will define the future.

Erika Stanley:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about who we spoke with today? Selma Hepp is Cotality's Chief Economist. Selma leads the economics team, which is responsible for analyzing, interpreting, and forecasting housing and economic trends in real estate, mortgage and insurance. Selma frequently appears on local and national radio and television programs and has been widely quoted in the Wall Street Journal, The New York Times, and many industry trade publications. She also regularly publishes on the Cotality Insights page. You can find her work on Cotality.com/Insights. Eliza Owen is the head of Residential Research Australia at Cotality. Eliza has a wealth of experience in property data analysis and reporting. She worked as an economist at Residex as a research analyst at Domain Group and previously as the commercial real estate and construction analyst at Cotality. Eliza is passionate about economics and is a popular keynote speaker having presented to thousands across the real estate, financial and construction sectors.

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