Australian home values have experienced a decline for the seventh month in a row, marking the fastest drop in capital city prices in four decades. The downturn, initially centered in Sydney and Melbourne, is now shifting towards mid-sized capitals like Brisbane and Perth, according to data from Cotality.
In October, the combined values across state and territory capitals fell by 1.4%. This broad-based slump has seen capital city home values decrease by 8.1% since March. Tim Lawless, Cotality’s research director, noted that the mid-sized capitals, which had seen extreme growth over the past six years, are now undergoing a correction. He reported that almost every suburb in Brisbane, Perth, and Adelaide has recorded a drop in value over the past three months.
The property market's decline has been exacerbated by four interest rate hikes this year, with a fifth anticipated as the Reserve Bank prepares to announce its decision on Tuesday. Economists predict double-digit falls in Australian property prices as interest rates continue to rise. Morgan Stanley has forecasted peak-to-trough drops of up to 15%.
Lawless identified high interest rates as the most significant factor driving the downturn. Affordability issues and a reduction in investor activity, spurred by recent government tax changes, have also contributed to the decreased demand. Despite the rapid pace of decline, Lawless emphasized that it reflects the previous strength of the property market.
Historically, Australian home prices began to diverge from wages in the late 1980s, with significant surges in the 1990s and early 2000s. This led to a state of unaffordable housing, further aggravated by investor-friendly tax policies that have only recently been adjusted. Over the past decade, property prices have doubled or nearly doubled in cities like Adelaide, Brisbane, Perth, and Hobart. Canberra has seen increases of over 50%, while Sydney and Darwin have experienced rises of more than 30%. Melbourne's prices have grown by just over 20%.
Despite recent declines, most homeowners still enjoy substantial gains. For instance, even a 20% drop in Perth prices from their peak would only revert the market to mid-2025 levels. Esho, an economist and chief executive at 13x, believes that the major housing markets of Sydney and Melbourne are nearing the bottom of their downturn, while mid-sized capitals are earlier in the cycle.
“The downturn is just part of a normal housing cycle, driven by interest rates, which are having a negative wealth effect, ” Esho explained. He does not foresee the price falls becoming systemic unless borrowing becomes difficult for prospective buyers or unemployment rises significantly.
Meanwhile, rental pressures have eased slightly. National vacancy rates are rising, and rent growth is slowing. Analysts attribute the rising vacancy rate partly to changing household dynamics. More renters are sharing homes or moving in with family due to affordability concerns, reversing the pandemic-driven trend toward smaller households with space for a home office.
