Australian Housing Market Plunges Amid Widespread Decline

As spring progressed, the housing market continued to struggle, with Cotality’s national Home Value Index (HVI) slipping 1.2% in October, marking the seventh consecutive month of decline. Since its peak in March, the national index has fallen 6.7%, equivalent to a $63,400 drop in the median Australian home’s value. Various challenges, including affordability and serviceability concerns, four interest rate hikes, low confidence, and cost-of-living pressures, have hindered housing demand, despite a shortage of new homes. The Federal Budget, introduced in mid-May, has also contributed to the downward pressure on the market.

Capital cities decline at the fastest pace in 40 years

Home values are declining at the fastest pace seen in the past forty years. The combined capitals index fell 8.1% in seven months. Over the same period, the 2022-23 downturn saw capital city values drop 7.0%. The earlier 2017-19 downturn, the largest peak-to-trough decline on record at -8.2%, recorded a 1.2% fall. Brisbane and Perth have overtaken Sydney with the fastest pace of decline. Dwelling values in these cities fell 2.0% and 1.7% respectively in October. This took values 6.1% and 5.7% lower over the rolling quarter. Sydney followed closely, with values down 1.6% over the month and 4.7% over the quarter.

The mid-sized capitals, where home values grew extremely over the past six years, are now in a correction. Virtually every suburb in Brisbane, Perth, and Adelaide has seen values drop over the past three months. However, given the magnitude of the previous upswing, most homeowners in these cities likely have a significant equity buffer. A 20% drop in Perth home values from their record high would only revert the market to around mid-2025 levels. Homeowners in Melbourne and Sydney are not in as strong a position. Melbourne home values are 7.3% lower than five years ago, and Sydney values are 1.5% below October 2021 levels. ACT values remain virtually unchanged from five years ago.

Shifts in buying and selling patterns

During the previous upswing, lower-quartile properties led growth by a significant margin. Recently, these trends have converged, especially in mid-sized capitals. There is now little difference in growth rates across value tiers. The number of home sales has dropped sharply as demand weakens. Modelled estimates show sales over the past three months are 23% lower than a year ago and 18% below the previous five-year average. Sydney and Brisbane saw the most significant declines, down 30% and 29% respectively compared to a year ago. With fewer buyers, selling conditions have deteriorated.

Auction clearance rates across the combined capitals consistently track below 50%. Private treaty metrics have also weakened. The median time on market, at 39 days, is the highest since August 2020. Vendor discounting, at 4.7%, is the largest since May 2019. Slower absorption rates have increased capital city listings to the highest level for this time of year since 2019. This rise in advertised stock comes despite fresh listings tracking almost 18% below average. Buyers now have more options and leverage, with less urgency to purchase compared to a year ago when home values were rising rapidly.

Economic Factors and Market Outlook

September’s inflation data showed annual headline inflation rising to 4.3%, exceeding expectations. The trimmed mean measure increased by 1.0% quarterly, the largest rise since the September quarter of the previous year. This pushed the annual rate to 3.7%. Persistent inflation has increased the likelihood of further interest rate hikes. Financial markets price in an 85% probability of a November hike.

Higher interest rates are expected to further constrain housing demand by reducing borrowing capacity and tightening loan serviceability assessments. The Reserve Bank of Australia has already raised the cash rate by 100 basis points this year to 4.60%. An additional 25-basis point hike would push the average variable mortgage rate to around 6.7% for owner-occupiers. This would reduce borrowing capacity by approximately 11.5%, or over $105,000, since the rate-hiking cycle began.

Broader Economic and Market Influences

The labor market shows signs of softening. The unemployment rate reached 4.7% in September, the highest since 2021. Annual employment growth has slowed to 1.2%, which may further dampen household confidence and income growth. Weak consumer sentiment, driven by higher rates, cost-of-living pressures, and a softer job market, weighs on housing demand. Historically, such sentiment has led to lower housing turnover as households delay major purchases.

Selling conditions continue to favor buyers. Advertised supply has risen due to slower absorption rates. Homes take longer to sell, and listings accumulate, giving buyers more options and negotiating power. Vendors may need to adjust their price expectations to align with market conditions. Changes to taxation policies in the Federal Budget, such as less favorable treatment of established investment properties, have contributed to a sharp pullback in investor demand. New investor loan commitments fell 8.6% in the June quarter.

Despite these challenges, factors like a shortage of new homes and significant equity buffers for many mid-sized capital homeowners may help contain the downturn. However, the housing market is expected to remain subdued through the rest of the year and into 2027. Ongoing economic pressures and low confidence will continue to shape the outlook.