Explore Pressures Facing the Australian Housing Market

Key Points:

• A combination of higher interest rates, changes to foreign buyer rules and recent tax reforms has led to falling house prices in some capital cities and slower growth in others.
• Housing market corrections of 10% are not unusual, particularly after periods of strong price growth.
• Vendor discounting (the extent to which the seller will reduce their asking price) has been a useful indicator of the changing market conditions and points to some further price softness in the months ahead.
• Lower property prices may create opportunities for buyers and investors with available capital, particularly in markets that have underperformed for an extended period, such as the Melbourne market.

Recent developments in Australian house prices:

June housing data highlights increasingly varied conditions across Australia’s property markets.

Home values continued to decline in Sydney, Melbourne and Canberra, while growth slowed sharply in Brisbane and Adelaide. By contrast, prices continued to increase in Perth, Darwin, and Hobart.

The chart tracks developments in home values across different states and territories and nationally, over the past fifteen years, highlighting several key points:

• Australia’s two most significant housing downturns over the past decade and a half saw price declines of 12-13%. The first period of decline (2017-2019) was related to tighter lending requirements associated with the Banking Royal Commission, while the second (2022) reflected the large increases in interest rates of 2022, which significantly reduced borrowing capacity.
• On both occasions, the price declines followed previous strong run-ups in price, while the unemployment rate was relatively unchanged.
• There have been significant differences in price trends among states and territories. Perth and Darwin experienced extended periods of price decline following the end of the mining investment boom in the 2010s. In contrast, Melbourne has seen subdued performance since the COVID-19 pandemic, partly due to state government tax changes on property in recent years. Recently, Perth, Brisbane and Adelaide have benefited from extremely strong population growth.

While national factors such as interest rates, tax settings and construction costs remain important, local supply and demand dynamics continue to play a major role in determining housing outcomes.

What's driving the recent market slowdown?

Most states show the classic warning signs for a pricing correction - a strong run-up in house prices beforehand - particularly Sydney, Brisbane, Adelaide and Perth. The following sequence of developments help explain how the current market situation evolved:

• March 2025 – the Federal Government announced a two-year ban on non-resident purchases of existing residential properties, a measure that was extended in the 2026 budget. Most significantly, given Chinese buyers have historically represented the largest share of non-resident purchases in Australia, this measure would have particularly affected Sydney, which has been a key beneficiary of that demand.
• The RBA became concerned about higher-than-expected inflation. In Q4 2025, it signalled that interest rates were unlikely to fall further, before increasing rates in February, March and May this year as inflation remained above target. This saw a drop in housing demand and led to an increase in the number of houses for sale.
• The May 2026 Federal Budget introduced significant changes to negative gearing and the capital gains tax discount, aimed at improving housing affordability for young purchasers. While the long-term impact remains uncertain, the changes alter the relative attractiveness of housing as an investment and reduce the amount that an investor can borrow by between 10% and 20%, according to home lending professionals.

Additional negative factors, including the sharp rise in oil prices as well as associated geopolitical uncertainty related to the US/Iran conflict and the rise in One Nation’s popularity, have also likely weighed on sentiment at the margin.

Housing market dynamics and outlook

Price corrections in Australia have generally been relatively orderly, mainly because Australia has not experienced a true recession or widespread forced selling since the early 1990s. When prices begin to decline, those that are not under pressure to sell typically remove their properties from sale and wait for conditions to improve.

One useful measure of market momentum is vendor discounts –an estimate of the amount that vendors have reduced their asking prices by to sell their properties. Vendor discounts have reflected recent variations in demand and supply quite well. Discounts levelled off in Q4 2025, before deteriorating slowly in Q1 2026 and more sharply in Q2 2026.

The recent sharp fall in discounts suggests further price falls are very likely over the next six to twelve months. Based on past trends, a national decline of 5-10% would not be an unreasonable expectation. Higher interest rates and reduced borrowing capacity were also present in both previous significant price corrections over the past fifteen years.

Some higher priced properties have reportedly already seen price declines of this magnitude. It will be important that the unemployment rate does not rise significantly, as this could result in larger declines. However, this is not currently being signalled by the trend for job ads though there has been a slight decline in recent months which bears monitoring.

Significant rises in construction costs, most often seen as a negative, also provide support to the market. This is because prices are unlikely to fall far below the cost of replacing housing. As always, it is important to recognise that house prices will be influenced by local demand and supply conditions as well, not just broader economic factors.

What it means for your business

Higher interest rates and a likely further correction in house prices may weigh on consumer confidence and spending as the second half of the year progresses. However, continuing low unemployment, recent falls in oil prices, high building costs and signs that the RBA will keep interest rates on hold for some months now could offset some of this pressure.

Many small businesses use their homes as collateral for business loans. If house prices continue to fall, some lenders may become more cautious about extending the same level of credit as they may have only a few months ago. This makes it even more important for business owners to regularly review their funding position, understand their borrowing capacity and seek support early if their needs change.

House price corrections provide opportunities for those with cash. Some markets may become relatively cheap if they have suffered a prior period of underperformance.

Finally, it is important to recognise that housing markets are influenced not only by economic conditions, but also by government policy. Potential future changes to taxation should always be a consideration in the house price outlook. Negative gearing was temporarily abolished between 1985-1987 under Treasurer Keating. That policy was reversed after rents rose sharply in Sydney and Perth and investor activity fell more sharply than anticipated. Already, the Federal Opposition is promising to repeal this budget’s tax changes, so there is a chance that the recent policy changes may not be long lasting.

While house prices seem set to continue a moderate decline in the next six to twelve months, most that have purchased housing prior to the past couple of years will remain ahead. Provided the unemployment rate remains relatively low, as is currently indicated, this should contain the price correction to the circa 10% declines typically witnessed. The price declines may be a factor causing the RBA to maintain interest rates at the current 4.35% for some months (including August’s Board Meeting), though ultimately some further increases are expected as the AI investment boom continues to keep Australian inflation above the RBA’s 2.5% target.

Author: Ivan Colhoun  Consulting Economist for Bank of Sydney Bachelor of Economics (Hons) Ivan is a highly experienced chief economist and keynote speaker on the Australian economy and financial markets. His career has included leadership roles within financial and professional service organisations, as well as the Reserve Bank of Australia.