Homeowners in Sydney are bracing for the most significant property price drop in 40 years, following six consecutive months of declines. The median house price in Sydney has fallen by $87,000 since November, from $1.632 million to $1.545 million, according to Realestate.com.au figures.
This downturn is largely attributed to rising interest rates, which have increased mortgage costs and made housing less affordable. Some potential buyers have been priced out of the market. In contrast, regional New South Wales is seeing better performance as buyers seek more affordable options.
Tim Lawless, head of research at CoreLogic, stated that Sydney is likely heading for its largest market correction in at least 40 years, a view shared by many in the industry. Further uncertainty looms with the possibility of a further cash rate increase by the Reserve Bank, although it has remained at 4.35 percent for recent reviews. Both Commonwealth Bank and ANZ predict a rate hike in November. The cash rate had previously increased three times between February and May this year.
Melbourne is experiencing an even steeper decline, with house values falling for a tenth consecutive month and decreasing by nearly $65,000 for a typical home. Factors contributing to Melbourne's weaker performance include increased housing supply and the lingering effects of COVID-19 lockdowns.
Eleanor Creagh, senior economist at REA Group and author of the report, noted that weakened investor demand, partly due to changes in negative gearing and capital gains tax policies announced in the Federal Budget, has also impacted the market. These budget changes, set to take effect in July 2027, restrict negative gearing to newly constructed properties and introduce a minimum 30 percent tax rate for capital gains, replacing the previous 50 percent discount with an inflation-adjusted method.
"Since the budget we've seen falling investor search activity on realestate.com.au and that's been corroborated by the lending data with investor borrowing pulling back," Creagh said. "Downward pressure on investor demand means less competition and can add to downward pressure on prices."
Ben Kingsley, founder of the Property Investors Council of Australia, agreed that the Federal Budget has exacerbated the downturn, describing it as a "property shock that's amplified the current downturn we are experiencing." He added that the federal government's actions have created a "sentiment shock which has flowed through into confidence for the market," affecting investors, first-home buyers, and others.
Creagh also pointed to investor tax changes implemented by the Victorian Government in 2023 under former premier Daniel Andrews as a reason for Victoria's underperformance since the pandemic. These changes made the property tax environment less favorable to investors, potentially reducing demand and leading some to sell properties.
Melbourne has shown the slowest growth in house values since 2016, with only 37 percent appreciation, making it the worst-performing capital city over that period. In contrast, house values in Brisbane, Adelaide, Hobart, and Perth have more than doubled.
Liberal housing spokesman Senator Andrew Bragg criticized the government's policies, stating that higher taxes are "destroying confidence and making new developments uneconomic." However, a spokesperson for Housing Minister Clare O'Neil defended the government's housing initiatives, highlighting measures aimed at assisting first-home buyers, such as tax reforms and a 5 percent deposit program. The spokesperson also emphasized that multiple factors, including interest rates, supply, and global economic conditions, influence house prices.
Looking ahead, Creagh indicated that the future direction of house prices will depend on the likelihood of further interest rate hikes and the performance of the upcoming spring selling season. "Spring selling season is going to be an important test of whether we see price falls continuing to ease or whether potentially there's additional downward pressure on prices if we do see a large increase in the flow of new listings here in the market," she said.