Australia’s housing downturn is being driven by a widening gap between income, borrowing capacity and home values, but the dip is likely to be “shallow and short-lived”, a new report has found.
In December, Australia’s property market eased with home values falling 0.1% after a flat result in November and a gradual slowdown over last year, according to CoreLogic.
Eliza Owen, the head of research at CoreLogic Australia, said the drop was exacerbated by slowing economic growth and “higher-for-longer” interest rates.
“After almost two years, the housing market appears to finally be buckling to these pressures,” she said. “Not just interest rates that have been higher for much longer than expected but affordability constraints, where there’s a massive gap between what people can realistically afford and what home values actually are.”
It was “all kind of underscored” by cost-of-living pressures and weakening economic conditions, she said.
A median income household in Australia with a 20% deposit could afford a home of $513,000, while the national median dwelling value is $815,000, she said.
Owen said that for the past two years the gap was likely sustained by a group of buyers less affected by interest rates, such as sellers flush with resale profits or buyers on high incomes.
“Some buyers may have been willing to accept higher housing costs in the short term, on the expectation that interest rates would fall,” she said.
“However, as lower interest rates have not materialised, housing demand from these buyers may also be waning.”
In December, only five of Australia’s 15 capital city and regional “rest of state” markets saw declines, according to the data.
Melbourne had the largest drop at -0.7%, followed by Sydney (-0.6%), Canberra and Hobart (-0.5%), and regional Victoria (-0.3%). Other regions had increases ranging from 0.03% in regional New South Wales to 1.2% in regional South Australia.
While the downturn was largely driven by Sydney and Melbourne, according to the report, the slowdown trend was evident in most regions.
Adelaide had the highest quarterly growth of the capitals at 2.1% in Q4 2024, but this was down from 3.6% in Q3 and 4.1% in the three months to May.
At a suburb level, 38% of markets fell in the December quarter, causing a -0.1% drag on the national index. Sydney and Melbourne accounted for 55.8% of these suburbs.
Owen said that while it would be welcome news for first home buyers trying to get into the market, it would not be “a massive gamechanger” for housing affordability in the long term.
“It won’t be a very long or large downturn because there’s still such a powder keg of fundamental demand for housing,” she said.
The largest recorded decline of the national home value index was 7.7% from October 1982 to March 1983.
