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    Australia’s housing downturn is underway. Higher interest rates have reduced borrowing capacity, while the Federal Budget has deliberately made investing in established residential property less attractive. Prices are likely to fall further. Even so, national house prices are unlikely to fall far during this cycle.

    The latest Cotality Home Value Index shows national house values fell by 0.8 per cent in July and by 2.0 per cent over the three months to July. Despite this, they remain 5.7 per cent higher than a year ago.

    The downturn is not occurring evenly. Sydney and Melbourne house prices are already down 3.4 per cent over the past year, while Canberra is down 0.5 per cent. Elsewhere, annual growth remains positive. Perth is still up 10.2 per cent, Darwin 13.1 per cent, Adelaide 6.4 per cent and Brisbane 6.3 per cent.

    The recent pace of decline allows us to test how long the downturn would need to last to produce a significant national fall. Since May, national house prices have fallen by an average of 0.68 per cent a month. If this continued for another three months before prices began recovering at the average rate recorded after previous major downturns, the annual result would briefly turn negative, bottoming at around 0.8 per cent below the previous year.

    If the downturn continued for another six months, the annual decline would reach around 4.9 per cent. Only if prices kept falling at their recent rate for another nine months, until April 2027, would the annual decline reach 7.9 per cent and become comparable with the Global Financial Crisis.

    This is not a forecast. It shows how prolonged the current downturn would need to become to produce a fall of that scale. There are several reasons why I do not expect that to happen.

    The market is currently in the first of three phases. Uncertainty about interest rates and the impact of the Budget is keeping buyers on the sidelines. Ray White’s open-home attendance has fallen to just 2.2 people per property, while Cotality’s modelled sales volumes across the combined capital cities are almost 30 per cent lower than a year ago. This is a market with very little activity rather than one being driven by widespread distressed selling.

    The second phase will begin when another interest-rate increase becomes very unlikely. The market does not need an immediate rate cut to improve. Greater certainty around the peak should be enough to bring some buyers back. The third phase will begin when the RBA starts cutting rates, although a recovery is likely to have already begun in at least some markets by then.

    The adjustment following the Budget should also begin to place a limit on the downturn. The removal of negative gearing on established homes caused investor lending to fall immediately. Without the tax benefit, investors require higher rental yields. This adjustment is already occurring in Melbourne and Sydney through a combination of prices falling and rents rising. As yields improve, established property will gradually begin to look more attractive again.

    Replacement costs provide a further constraint. The cost of building a new house is now 51 per cent higher than at the end of 2019 and rose by a further 5.9 per cent over the past year. Existing-home prices can fall while the cost of building continues to rise, but the gap cannot keep widening indefinitely. Once established housing becomes materially cheaper than delivering new supply, projects stop stacking up and buyers are redirected towards existing homes.

    This is already affecting construction. Private new-house completions fell by 0.6 per cent in the March quarter, while commencements fell by 3.5 per cent. Around 879,000 dwellings were completed over the five years to March 2026, an average of approximately 176,000 a year. The Government’s target of 1.2 million homes over five years was intended to lift supply sufficiently to improve housing affordability and requires 240,000 completions annually. The National Housing Supply and Affordability Council expects around 980,000 homes to be delivered over the Accord period, leaving a shortfall of approximately 220,000. Falling this far short means the underlying housing shortage will persist. 

    The GFC downturn occurred during a global credit shock and severe stress across the financial system. The current market is markedly different. Transaction volumes are exceptionally low, but there is no equivalent shock forcing large numbers of owners to sell.

    Sydney and Melbourne are likely to record further falls, while annual growth elsewhere will continue to slow. National prices could also move briefly into annual decline. However, matching the GFC would require the current weakness to continue until April next year. Greater interest-rate certainty, improving investor returns, rising replacement costs and continued undersupply are all likely to intervene before that occurs.

    Footnote: Recovery assumes national house prices rise by 0.75 per cent a month, calculated as the average compound monthly increase during the first six months following the January 2009, January 2012, May 2019 and January 2023 troughs in Cotality’s national house-price index. 

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