Australia’s housing market is facing a significant downturn, with prices expected to decline by as much as 10% amid a challenging economic backdrop and the prospect of further interest rate increases, economists say. New data indicates that house prices are falling in over 90% of Australian suburbs, driven by rising borrowing costs, a subdued economy, and recent changes to tax policies affecting property investors.

Shane Oliver, chief economist at AMP, forecasts that average home values will continue to slide over the next six to nine months, leading to an overall decline of roughly 10% from recent peak levels. He described this potential drop as the steepest since World War II, although noting it remains broadly comparable to earlier market corrections, including the 8% fall recorded during 2022-23.

House prices nationally have already fallen by just under 4% from their highs, but remain approximately 3% higher than a year ago. Sydney and Melbourne have seen the sharpest reductions, with declines near 7%. Analysts at the Commonwealth Bank of Australia (CBA) anticipate further falls, projecting a 12-13% drop in property values in Sydney and Melbourne and roughly 8% declines in Brisbane, Perth, and Adelaide. CBA economists highlighted that the pace and scale of the recent market adjustments have exceeded earlier expectations.

Despite these price declines, experts emphasize that housing affordability in Australia is unlikely to improve substantially. Oliver noted that the reductions largely return home prices to levels observed a year ago, a period when concerns about affordability were already prominent.

Reserve Bank governor Michele Bullock acknowledged the ongoing downturn in the housing market during a press conference on August 11 but indicated that property prices were not the primary consideration influencing monetary policy decisions. She pointed out that overall housing values remain about 50% higher than in 2020.

Both Oliver and Challenger’s chief economist Jonathan Kearns—himself a former senior RBA official—expect the Reserve Bank to proceed with a fourth interest rate increase, potentially at its November meeting. They argue that while the housing market correction is substantial, it has not yet reached a level sufficient to deter further tightening. The overarching concern for policymakers remains the need to curb persistently high inflation.

Adding to the economic headwinds, figures expected soon are likely to show minimal economic growth in the quarter ending June. Belinda Allen, head of Australian economics at CBA, anticipates GDP growth of just 0.1%, marking Australia’s slowest expansion in two and a half years. She highlighted several factors contributing to the inflationary pressures despite slowed growth, including ongoing supply chain disruptions, increased domestic expenditure by Australians, and declining productivity growth. According to Allen, these elements suggest the Reserve Bank will have further work ahead in its efforts to control inflation.