Lacklustre luxury property fails to keep pace with broader market

Luxury property in Australia is delivering economy-class results for property investors, with capital growth rates below that of the wider market and tumbling compared to other international prestige markets.

Perth and Brisbane have delivered the strongest growth among the top 5 per cent of properties but even their performance was far short of spectacular and broadly in line with inflation.

Melbourne and Sydney luxury markets went backwards, with a drop of 0.7 per cent and 2.1 per cent respectively.

Knight Frank’s Prime Global Cities Index (PGCI) Q1 2025, which tracks the movement of prime residential prices across 44 cities worldwide, revealed Perth was in 16th place globally, with luxury property price growth of 3.8 per cent over the year to the end of March.

Brisbane saw the second highest growth out of the Australian cities, with a 2.8 per cent increase, putting the city in 18th place. Both mid-sized capitals recorded growth at or above the 2.8 per cent average annual growth for the 44 global cities analysed.

Those overall results compare unfavourably to the national median dwelling value increase of 3.2 per cent over the 12 months to 1 May, and the 5.3 per cent gains made in regional Australia. Trimmed mean annual inflation, by comparison, is at 2.9 per cent and down from 3.3 per cent during the previous quarter.

Over the past three months Sydney, Melbourne and Perth have all seen a fall in luxury residential price growth, with Brisbane the only one in positive territory, recording a minor increase of 0.1 per cent.

The scene playing out in Australia’s prime property market is similar to that in other cities around the world.

The 2.8 per cent average annual price growth recorded across the 44 cities analysed in Knight Frank’s PGCI Q1 2025 represents a marginal slowdown from the 3.2 per cent recorded in Q4 2024, suggesting while the recovery in prices continues, momentum remains modest and uneven.

Knight Frank’s Global Head of Research Liam Bailey said the direction of interest rates remained the pivotal factor for future price growth in luxury residential property markets.

“Although inflation has been easing in many key economies, US policy on tariffs has created the potential for significant future volatility,” he said.

“There is the potential for disinflationary pressures to increase outside of the US, while the US itself faces a risk of higher inflation.

“While expectations of interest rate cuts have risen outside the US, including in Australia, greater clarity on the pace and extent of future cuts is needed before we see significant upside in pricing in most housing markets.”

There has been a slight uptick in the number of prestige homes hitting the market in Australia, which has also dampened price growth.

Knight Frank’s The Wealth Report 2025, released in March, forecast that Perth was again expected to lead luxury property price growth in in Australia over 2025, with a 3 per cent predicted rise over the calendar year, followed by Brisbane and the Gold Coast with 2 per cent and Sydney at just 1 per cent. Melbourne prices were expected to remain flat.

Prestige suburbs at affordable prices

Premium areas, those within close proximity to a CBD, beach, harbour, river or bay, or services such as public transport, entertainment precincts and well-regarded schools, can be achievable for property buyers on a lesser budget.

Shaun Thomas, Director, Herron Todd White, said the gulf between house and unit prices in premium suburbs was usually greater than the rest of the market and represented a way of getting into those areas.

The gap in median values between houses and units continues to widen, with Sydney’s gap being a massive $608,594, Canberra $373,817, Melbourne $312,189 and all other capitals except Hobart between $228,800 and $286,730, at the end of February according to Cotality (formerly CoreLogic).

“When it comes to premium suburbs, the gap often widens further. In Bellevue Hill in Sydney, the median house value in February was just over $10.7 million,” Mr Thomas said.

“The median unit price at just over $1.7 million was a whopping 84 per cent, or nearly $9 million, lower.

“In Toorak in Melbourne, the difference is similarly wide at 80 per cent ($4.91 million versus $971,000), while in Cottesloe in Perth, the difference is a substantial 60 per cent ($3.25 million versus $1.29 million).”

He said that if buyers’ sights were still set on houses, then they had to look at other characteristics that may provide a more affordable option in an expensive suburb.

“Considering properties on a main road, those with smaller land sizes including terraces and semi-detached homes, or dated or unrenovated homes – the fabled worst house on the best street – are all likely to lead to hundreds of thousands, if not millions, of dollars in price difference.”

So-called bridesmaids suburbs were also an option.

“A further option available is to consider a suburb or two away from a premium suburb which usually means you are still within close proximity to all the features which make that suburb so highly sought after but at a more affordable price.

“These suburbs will often ride the coattails of their premium neighbours when the market rises, which is likely to mean stronger capital growth over time as middle to upper markets are often the first to move and will often see bigger upswings during periods of growth.

“The flipside is that when the market starts to cool, they will also be the first to move in the other direction and suffer larger corrections during market downturns.”

Rate cuts could well result in prestige areas moving further out of reach of the average buyer.

Research from Cotality shows it has historically been the upper quartile sectors of the market, especially in Sydney and Melbourne, that have been most reactive to rate cuts.

Their estimates based on previous periods of rate reductions that national dwelling values would increase an average of 6.1 per cent for each 1 percentage point decline in the cash rate.

Eliza Owen, Head of Research, Cotality, said a reduction in the cash rate could spur a recovery trend in the high end of the Sydney and Melbourne housing market, which tend to be the bellwether for broader market recoveries in those cities.

“If history is anything to go by, certain markets will see a bigger boost from rate reductions than others, and it may be because of market characteristics like price point, location and investor interest.

“Relatively expensive markets have historically shown stronger responses to reduced cash rate settings, especially in the house sector.

“Key examples are houses in Leichhardt, Hawthorn and other inner markets of Sydney and Melbourne which have previously shown the strongest reaction to a reduction in the cash rate,” Ms Owen said.

In Leichardt, a one per cent reduction in interest rates is associated with a 19 per cent increase in house values.