Source: The Conversation (Au and NZ)
With national property values down by 5.2% in September from their March peak, Australia’s housing market is in a distinct downturn. This has sparked concerns voiced by Opposition Leader Angus Taylor of a housing market “in freefall”.
Translated into dollar terms, using the Domain property price series, the price of a typical home has dropped to about what it would have fetched one year ago.
Let’s put that price decline further into perspective.
What’s behind the change in sentiment?
The fall in house prices is controversial partly because of the link to the property tax reforms announced in the federal budget in May.
Importantly, though, the current market down cycle was already well established in most parts of Australia before that, following the first official interest rate rise in February. Prices peaked in March and have now fallen for six straight months.
Experts at Treasury estimated the tighter rules on negative gearing and capital gains tax unveiled in the budget would dampen prices only around 2% over “a couple of years”. That’s in line with earlier independent analysis. We should assume those expert judgements are valid.
Much of the long-term run-up in house prices was fuelled by generally declining interest rates over three decades to 2020; each rate cut boosted buyers’ borrowing capacity. That suggests interest rate hikes have been the key driver of this year’s price drop.
Prices have further to fall
The Reserve Bank of Australia raised rates last week for the fourth time this year, and financial markets expect at least one more rate rise in November or in 2027.
That being the case, many experts anticipate further house price falls. For example, Cotality’s research director Tim Lawless believes an overall reduction of 10–15% is “a fairly reasonable estimate”.
While the current downturn is Australia’s fifth in only 20 years, a 15% price fall would — if realised — amount to a larger slide in values than in any previous downturn. Previous slumps have generally seen peak-to-trough declines of 5–10%. By comparison, US national house prices fell by more than 25% from 2006–11.
However, Australian price prospects need to be kept in perspective. According to one respected index, median national property prices (houses and units combined) have climbed by 78% since 2020. If the current downturn does reach 15%, that will see prices reduced only to their level in early 2024.
First home buyers and negative equity risks
It’s true this would expose some recent first home buyers to negative equity — that is, where the outstanding mortgage exceeds the home value.
Those most at risk would be first home owners who bought their property in 2025 with only a small deposit — for example, under the federal government’s 5% deposit scheme. The RBA noted this risk in last week’s Financial Stability Review.
However, most first home buyers have until recently needed a 20% downpayment. And the bulk of Australia’s homes were already held by their current owners in 2024.
The overwhelming majority of owner-occupiers and landlords would therefore continue to hold equity, even if prices fall 15%. Properties held since 2020 or earlier will be generally worth vastly more than their original price, even in that scenario.
Read more:
Why most homeowners don’t need to lose sleep over negative equity
There’s an upside for (some) first home buyers
For aspiring first home buyers, of course, declining property prices are ostensibly a cause for celebration.
Unfortunately for them, however, at least in our largest cities, the largest price falls have been at the top end of the market. Price declines have been smaller for entry-level homes.
Cotality’s latest analysis shows the top quarter of Sydney properties have fallen by 5.3 percentage points more than the bottom quarter. For Melbourne the gap is 6.6 percentage points.
Unfortunately, while rising interest rates depress prices, they also reduce the amount prospective buyers can borrow.
For most first home buyers, therefore, slightly less expensive properties may be no more affordable.
But some of the biggest gainers from the current market downturn will be first home buyers substantially backed by the bank of mum and dad.
If they can enter the market without a giant home loan, this lucky group will benefit from prices depressed by rising interest rates, while being insulated from mortgage cost pressures.
Ripple effects for the industry and for government
As with previous downturns, the volume of sales is drying up as buyers hold back and wait for prices to recover. Westpac, for example, reports a 17% year-on-year drop in transactions.
In these market conditions, potential home buyers may also delay action in the hope of further price declines.
The resulting hit to the real estate industry comes from the compounding effect of both reduced prices and fewer transactions. There are even reports of real-estate agents going door to door in the hope of rustling up a sale.
More broadly, the downturn will also squeeze tax revenues for state and territory governments, which have become heavily reliant on stamp duty.
In New South Wales and Victoria, for example, stamp duty accounted for 18.5–22.5% of all revenue sourced within the state in 2022–23. The proportion is likely to have risen since then amid the market boom.
Calls for the states to trim spending are likely to grow as a result. It can only be hoped this will remind Australian governments of the case, overwhelmingly supported by economists, for replacing stamp duty with a broad-based land tax. The ACT has already moved down this path.
This would result in a more reliable revenue stream for state and territory governments, as well as reducing the disincentive for homeowners to move house when their circumstances change.
More importantly, though, by discouraging land speculation and land banking, moving to a broad-based land tax system would contribute to a more stable property market less susceptible to booms and busts.
Hal Pawson has receives funding from the Australian Housing and Urban Research Institute, from Homelessness Australia, and from Crisis UK. He is affiliated with Community Housing Canberra as a non-Exec Director and with Senator David Pocock – as a part time unpaid advisor.
Original source: https://analysis1.mil-osi.com/2026/10/05/this-chart-tells-you-everything-you-need-to-know-about-the-downturn-in-property-prices/