Australia’s housing downturn is spreading — and another rate rise could deepen the divide

Home values are falling, but cheaper property does not automatically mean more affordable housing. With inflation still elevated, Australians face the uncomfortable prospect of declining wealth alongside higher mortgage repayments.

Australia’s housing market is losing ground just as households confront the possibility of another interest rate increase.

Cotality’s national home value index fell 1.1 per cent in September, its sixth consecutive monthly decline. National values were 5.2 per cent below their March peak, according to Westpac’s analysis of the figures. This is now a sustained correction rather than an isolated weak month.

The downturn has also spread across markets that previously appeared to be travelling in different directions.

Domain’s September-quarter report found house prices declined in every capital city for the first time in 15 years. Combined capital city house prices fell 4.7 per cent over the quarter, while unit prices fell 3.5 per cent. These quarterly median-price figures measure the market differently from Cotality’s monthly value index, but both point towards a broadening downturn.

For Australians who have spent years watching property move beyond their reach, falling prices might sound like welcome relief.

For those who recently borrowed heavily to buy, the same movement can mean shrinking equity and growing anxiety.

And for the Reserve Bank, weaker property prices do not settle the question that matters most: whether inflation is coming under control.

Why prices are falling

A housing shortage does not guarantee rising sale prices.

People need somewhere to live, but purchasing a property requires income, a deposit and access to credit. When borrowing becomes more expensive, the amount buyers can offer falls.

A household might still want the same three-bedroom home near a school or railway station. Its lender may simply approve a smaller loan.

Multiply that adjustment across thousands of buyers and sellers eventually encounter a different market.

Higher living expenses reinforce the squeeze. Food, electricity, insurance, transport and other commitments absorb income that might otherwise support mortgage repayments or build a deposit.

Confidence matters too. Buyers who expect further price falls have a reason to wait. Sellers who initially resist lower offers may eventually reduce their expectations, particularly when they need to complete another purchase or resolve a change in family circumstances.

Domain identifies higher interest rates, living costs and changes to housing investment tax policy as headwinds to purchasing decisions. Its report also describes longer selling periods, increased discounting and weaker auction conditions.

The result is a market in which housing remains desperately needed, but fewer buyers can — or will — pay yesterday’s price.

The decline is nationwide, but the damage is uneven

Westpac’s summary of Cotality’s September figures shows how widely the monthly falls have spread:

Sydney and Melbourne were also down 7 per cent and 6.2 per cent respectively over the year on that measure.

Quarterly results capture a longer period. Domain recorded falling house prices across Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Canberra and Darwin in the September quarter. Perth’s quarterly house-price decline was 7.4 per cent.

Regional Australia requires closer local examination. A commuter town, a mining centre, a farming district and a coastal retirement destination have different employment markets, buyer pools and supply constraints.

A national decline does not mean every home has lost the same percentage. Nor does it mean a particular property will sell for less than it did a year ago.

Location, condition, purchase timing and the owner’s need to sell still matter enormously.

Which property classes are most exposed?

Expensive houses dependent on large mortgages

High prices can become vulnerable when the buyers supporting them depend on substantial borrowing.

A relatively small percentage reduction in purchasing capacity translates into a large dollar adjustment at the expensive end of the market.

However, prestige property is not a single category. A scarce waterfront home sought by cash-rich buyers can behave differently from an expensive suburban house purchased with a very large mortgage.

The important distinction is how dependent the available buyers are on credit.

Houses compared with units

Units have shown greater resilience in Domain’s latest quarterly figures, although they have also fallen.

Their lower purchase price can keep them within reach of buyers who can no longer finance a detached house. That relative affordability offers support, without making apartments immune to a downturn.

Individual buildings also carry individual risks. Strata charges, maintenance requirements, defects and potential special levies can outweigh an apparently attractive purchase price.

Properties requiring substantial renovation

A cheaper purchase can still be an expensive project.

Buyers need to consider the combined cost of acquisition, repairs, borrowing and temporary accommodation. When budgets tighten, a house requiring immediate work may attract fewer bidders than an otherwise comparable home ready to occupy.

There is no automatic bargain in buying a discounted property if the work needed to make it suitable remains unaffordable.

Investment properties with weak cash flow

Investors must consider the gap between rental income and the full cost of ownership.

Interest, rates, insurance, maintenance, management fees and strata expenses continue regardless of whether the property’s estimated value rises or falls.

An investor able to absorb that gap may hold through a downturn. An investor relying on continuing capital growth to justify persistent losses faces a more difficult calculation.

Which Australians are most affected?

The sharpest financial pressure does not necessarily fall on the owner recording the largest paper loss.

A long-term owner with a small mortgage may see a substantial reduction in estimated wealth while remaining comfortable with repayments.

A recent purchaser with a modest income and a large loan can face a much smaller price fall with much more serious consequences.

Recent low-deposit buyers are particularly exposed to shrinking equity. As a simple illustration, someone purchasing a $900,000 property with a 5 per cent deposit begins with a $855,000 loan, before allowing for transaction costs. A 5 per cent fall would reduce the property’s value to $855,000.

That does not automatically force a sale. Repayments, employment and the remaining loan balance matter. But it illustrates how quickly a small initial equity buffer can disappear.

People forced to move are also vulnerable. Separation, illness, relocation or unemployment can turn a paper decline into a realised loss.

First-home buyers receive a mixed outcome. Lower prices can reduce the deposit required, but higher interest rates can reduce borrowing capacity and increase repayments.

Renters should not assume falling sale prices will deliver immediate rental relief. Purchase prices and rents respond to different pressures, including local rental availability and household formation.

Why falling house prices may not stop the RBA

Australia’s inflation figures explain why another rate rise remains a serious possibility.

The ABS reported annual inflation of 4.3 per cent in September, up from 4 per cent in August. The monthly trimmed mean measure of underlying inflation was 3.6 per cent over the year.

The cash rate is currently 4.60 per cent, with the next RBA decision scheduled for Tuesday, 3 November. Following the inflation release, NAB changed its forecast to a quarter-percentage-point increase in November. That remains a forecast; the decision has not been made.

There is an uncomfortable distinction here.

Established home prices can fall while the cost of living continues to rise. The CPI does not measure established house purchase prices as household consumption. Its housing component includes expenses such as rents, new dwelling construction and electricity.

In September, the ABS recorded annual increases of 4.7 per cent for new dwellings, 12.8 per cent for electricity and 3.6 per cent for rents. A weaker resale market therefore does not mean housing-related inflation has disappeared.

Another rate increase, if passed through by lenders, would put further pressure on repayments and purchasing capacity.

It could also make buyers more cautious about committing before they understand where borrowing costs will settle.

Cheaper homes do not resolve the housing shortage

A price correction changes what existing homes are worth. It does not automatically produce additional homes.

There is also a potential supply problem: if expected selling prices weaken while construction and financing costs remain high, some proposed developments become harder to justify.

Australia can therefore experience falling property values alongside persistent difficulty finding suitable housing.

That is why success should not be measured solely by whether prices rise or fall. The more useful test is whether households can secure appropriate accommodation at a sustainable cost.

The Times View

Australia’s housing downturn is exposing the difference between owning an asset and being able to afford a home.

For established owners with manageable debt, lower prices may be an uncomfortable change in estimated wealth. For recent buyers carrying large mortgages, another rate rise could tighten household budgets while reducing their equity. For aspiring owners, a lower asking price may still come with an unaffordable loan.

The next RBA decision will sharpen that divide.

The question is no longer simply how far property prices might fall. It is whether Australians’ capacity to pay for housing improves as they do.