With borrowing capacity cut, house prices will plunge

Australian home values are on track to record their most significant decline in more than four decades, according to Cotality’s daily dwelling values index. The index shows that across the five major capital cities, property prices have fallen by 8.5% from their April 10, 2026, peak, narrowly missing the previous record of 8.6% between November 2017 and May 2019. The rate of decline has accelerated, with home values dropping 4.6% in the previous quarter alone.

Cotality has projected further declines in housing values due to the Reserve Bank’s five rate hikes this year, decreased borrowing capacity, and changes to negative gearing and capital gains taxes introduced in the May federal budget. Higher interest rates have had a substantial impact on residential property demand, driving the fastest downturn across the combined capital cities in the past four decades.

The cumulative effect of the five rate increases in 2026 has increased mortgage costs and reduced the borrowing capacity of households. Using the average owner-occupier mortgage as of June (almost $742,000), mortgage repayments are now about $600 higher each month (14%) compared to January. The median income household's borrowing capacity has decreased by around $88,000 (12%) since the start of the year following the fifth rate hike.

This reduced borrowing capacity, coupled with existing affordability constraints, the decline in consumer confidence, and the pullback of investors following the May federal budget, has led to a significant slowdown in property sales. Cotality estimates that sales volumes for the five major capital cities in the three months leading up to October will be about 26% lower than the same period last year.

Home values in the combined capital cities have fallen 8.1% from their March peak, nearing the record peak-to-trough decline observed between late 2017 and mid-2019.

The 12% decline in borrowing capacity due to the Reserve Bank’s five interest rate hikes is particularly significant. As noted by AMP chief economist Shane Oliver, borrowers' capacity to pay has plummeted and far exceeds the current market prices. The gap between the capacity to pay and home prices has never been wider, estimated at around $400,000 by Oliver.

To bring property values in line with borrowers' capacity to pay, a deeper decline of around 15% is required, according to Oliver. This decline is deeper than any seen in the past 40 years of property market history but aligns with the perfect storm now affecting the market.

According to Oliver, property prices are expected to reach their lowest point by next September's quarter, with the market anticipating RBA rate cuts. However, the reporter holds a firm belief that Australia will experience a house price crash similar to New Zealand's, with values plummeting sharply over an 18-month to two-year period, followed by stabilization for many years and a decline in real, inflation-adjusted terms.

The 30-year housing supercycle appears to be coming to an end, influenced by the rising long-term mortgage rates, removal of property tax concessions, record low affordability, and a shift towards lower immigration following nearly two decades of high immigration.