Overview
- Australia’s housing market looks to be on the verge of a downturn as higher interest rates and stretched affordability weigh on demand.
- Sydney and Melbourne are already five months into the early phases of decline, while growth is slowing across the mid-sized capitals.
- Historically, housing downturns have been relatively short-lived, with all but three capital city downturns over the past 40 years lasting less than 12 months.
Australia’s housing market looks to be on the verge of a downturn as higher interest rates and stretched affordability weigh on demand, following a period of strong growth that has left most homeowners well insulated against softer conditions.
Cotality’s latest Housing Chart Pack shows conditions are easing as borrowing capacity tightens, with analysis of the Home Value Index indicating Australia’s combined capital city markets have recorded 10 downturns lasting at least three months over the past 40 years.
Cotality Research Director Tim Lawless said historically there’s been several catalysts for housing declines, including global shocks, rising interest rates, periods of credit tightening as well as changes in fiscal policy and broader market factors such as affordability and sentiment.
“Sydney and Melbourne are already five months into the early phases of decline, while growth is slowing across the mid-sized capitals. Listings are picking up as demand softens, interest rates are rising while affordability and serviceability pressures are biting,” he said.
With capital city home values only 0.2% higher in April, and fading, Mr Lawless said there is a good chance Cotality’s combined capitals index will move into decline over the coming months as further momentum leaves the market.
“This trend has been amplified by seventy-five basis points of rate hikes so far this year and the chance of another hike, or hikes, later in the year,” he said.“Importantly, the market was already slowing well before the hiking cycle commenced, highlighting the downside impact of waning confidence from late last year alongside rising inflation and worsening levels of housing affordability.”
The largest decline of the past 40 years was between 2017 and 2019 when capital city values fell 8.2% from peak to trough over 19 months, after a period of strong growth and the introduction of tighter lending conditions following the Royal Commission into the banking and finance industry.
More recently, values fell 8.1% over nine months in 2022–23 as interest rates rose sharply from pandemic lows.
Mr Lawless said the current phase follows a period of substantial gains leaving most homeowners in a relatively strong equity position despite softer conditions, with the Reserve Bank estimating less than 1% of households were in negative equity at the start of the year.
The combined capitals Home Value Index has risen 33.7% over the past five years, with markets such as Perth, Brisbane and Adelaide recording growth of around 80% to 90% over the same period.
“Historically, housing downturns have been relatively short-lived, with all but three capital city downturns over the past 40 years lasting less than 12 months, although the length and magnitude have varied from city to city,” he said.“For example, post mining boom, the Perth market navigated a 61-month downturn where values fell 15.3% from peak to trough. Darwin saw an even longer downturn with values falling over 69 months from mid-2014.”
Supply and demand metrics
The tight supply conditions that have underpinned the market over recent years are starting to ease, with listing levels increasing as buyer demand softens rather than a surge in new stock coming onto the market.
There were 39,319 properties added to the market nationally in the four weeks to early May, 4.7% above the five-year average. The total stock of advertised properties remains low nationally, but is rising, and holding at above average levels in Sydney, Melbourne and Canberra.
Although the market is weakening, it’s unlikely we will see a material pick up in distressed sales or mortgage arrears. At the end of last year mortgage arrears were relatively low at around 1.45%, below the 1.69% peak recorded when interest rates were at similar levels in mid-2024.
“An expectation that labour markets will remain tight, as well as a history of stringent prudential standards, including the three percentage point mortgage serviceability buffer, should help to keep mortgage arrears low as interest rates rise,” Mr Lawless said.
More recent buyers are likely to be exposed to the risk of negative equity as values fall, particularly those who entered the market with smaller deposits, including participants who took advantage of the Australian Government 5% Deposit Scheme.“Recent buyers are arguably at more risk of seeing negative equity, given they have had less time to accrue value in their property or pay down the principal of their loan,” he said.
“However, mortgage repayments are typically prioritised, with borrowers more likely to adjust spending elsewhere before missing a payment.”
