Can Australia make housing affordable while avoiding a major market crash? We may soon find out

Over the last four decades, Australia has experienced seven property market downturns of varying lengths and depths, according to analysis by AMP’s chief economist Shane Oliver. These downturns have typically been triggered by interest rate hikes, which make home loans more expensive, but they can also occur during crises and policy changes.

For instance, there was a short-term decline in April 2020 during the Covid-19 pandemic lockdowns, when average capital city home values fell by 1.5% over three months. Two years later, after the RBA's intervention against inflation, prices dropped by 8.1% between April 2022 and January 2023. The most significant property price fall in recent history occurred in September 2017 when average capital city home values declined by 8.2% over 19 months due to a regulatory crackdown on investor lending.

Oliver predicts that average prices across the capital cities will continue to fall until around April next year, marking a 7.8% drop from peak to trough. Recently, the main driver of the decline appears to be a shift in sentiment due to government changes in property investor taxes, rather than just interest rate hikes. This sentiment shift makes it challenging to predict how the market will turn out.

However, the downturn varies depending on the location, with NAB economists forecasting peak-to-trough declines of 10% in Sydney and Melbourne, versus 2% to 4% in mid-sized capital cities. They also predict that values in Brisbane, Perth, Adelaide, and Hobart will be higher in 2026. The analysts believe that house prices will level out in early 2027 before growing modestly through the second half of next year, thanks to lower interest rates and improving sentiment.

The current outlook suggests that house prices may continue to be supported by the imbalance of supply and demand. However, less generous tax settings for property investors may make betting on rising home prices less attractive. Interest rates are expected to remain higher than pre-pandemic levels, which could lead to stagnating property price growth, potentially becoming the new normal.

Will this represent a step towards more affordable housing without a major crash? While it may not be a complete solution, it could be a start.