Home prices decline for a seventh straight month as higher rates curb demand

The centre of the housing downturn is shifting away from Sydney and Melbourne, although most owners are still holding substantial gains after years of strong price growth.

Australian home values have fallen for a seventh month in a row, with capital city prices now dropping at the sharpest rate in four decades as higher mortgage costs deter buyers.

Cotality data shows the weakness is moving from Sydney and Melbourne to the mid-sized state capitals, with Brisbane and Perth recording the biggest declines in October.

Across the state and territory capitals combined, values slipped 1.4% over the month.

Cotality research director Tim Lawless said the downturn had become broad-based, with capital city home values down 8.1% since March.

“The mid-sized capitals, where home values recorded extreme growth conditions over the past six years, are now well and truly in a correction,” Lawless said.

“Virtually every suburb across Brisbane, Perth and Adelaide has recorded a drop in value over the past three months.”

The property market has been weighed down by four interest rate rises this year, with a fifth widely anticipated when the Reserve Bank delivers its next decision.

Most economists expect Australian property prices to fall by double digits as rates continue to climb, and Morgan Stanley is forecasting peak-to-trough declines of as much as 15%.

Lawless said high interest rates were the “most significant downside influence”, while affordability pressures and reduced investor demand following government tax changes had also hurt the market.

Even so, he said the pace of decline looked extreme largely because the market had been so strong beforehand.

Australian home prices began to drift away from wage growth in the late 1980s, then surged through the 1990s and early 2000s, pushing the country deeper into unaffordable housing, a trend that was reinforced by investor-friendly tax settings that have only recently been unwound.

Over the past decade, prices have doubled — or nearly doubled — in Adelaide, Brisbane, Perth and Hobart. They are up by more than 50% in Canberra, more than 30% in Sydney and Darwin, and just over 20% in Melbourne.

Despite the recent softness, most homeowners remain well ahead. Cotality analysis suggests that even a 20% fall in Perth prices from their peak would only return the market to mid-2025 levels.

Peter Esho, an economist and chief executive at 13x, said he believed Sydney and Melbourne were “close to bottoming”, while the mid-sized capitals were at an earlier stage of decline.

“The downturn is just part of a normal housing cycle, driven by interest rates, which are having a negative wealth effect,” Esho said.

“They’re really denting sentiment, and real estate is a sentiment asset.”

Esho said he did not expect the price falls to become “systemic”, saying that would require a serious tightening in access to borrowing, similar to the US during the global financial crisis, or a sharp rise in unemployment.

Rental conditions have eased slightly, with national vacancy rates edging higher and rent growth slowing, according to Cotality.

Rents are still more than 50% higher than six years ago, adding about $245 a week to the median rent and rising much faster than wages.

Analysts partly attribute the higher vacancy rate to changing household behaviour. Because of affordability pressures, more renters are sharing homes or moving back in with family, reversing the pandemic-era move toward smaller households with space for a home office.