Australian housing: Capital city prices hit 40-year decline pace

Owners in Australia’s state and territory capitals are facing their sharpest price correction in four decades. Home values across these cities dropped 1.4% in October, extending a losing streak to seven consecutive months. The decline is now moving away from the traditional hubs of Sydney and Melbourne toward mid-sized capitals like Brisbane and Perth, which led the monthly drop.

The Reserve Bank of Australia has raised interest rates four times this year. A fifth increase is expected when the central bank announces its decision on Tuesday. These hikes are the primary driver of the downturn, according to Cotality research director Tim Lawless. He noted that capital city home values are down 8.1% since March. Lawless described the mid-sized capitals as being in a deep correction after recording extreme growth over the past six years.

"Virtually every suburb across Brisbane, Perth and Adelaide has recorded a drop in value over the past three months," Lawless said. He identified high interest rates as the most significant downside influence. He also pointed to affordability challenges and a pullback in investors caused by recent government tax changes as factors denting demand.

Economists project continued declines. Morgan Stanley forecasts peak-to-trough drops of up to 15% in Australian property prices. Peter Esho, chief executive at 13x, believes Sydney and Melbourne are close to bottoming out. However, he views the mid-sized capitals as being at an earlier stage of the downturn. Esho stated that the decline is part of a normal housing cycle driven by rates, which are creating a negative wealth effect.

"They’re really denting sentiment, and real estate is a sentiment asset," Esho said. He does not expect the falls to become systemic. He noted that systemic risk would emerge if borrowing became difficult or unemployment surged, similar to conditions in the United States during the global financial crisis.

Despite the recent weakness, most homeowners retain substantial equity. Cotality analysis indicates that even a 20% drop in Perth prices from their record high would only return the market to mid-2025 levels. Property prices have doubled or nearly doubled in Adelaide, Brisbane, Perth, and Hobart over the past decade. Sydney and Darwin have seen increases of more than 30%, while Melbourne prices are up just over 20%.

Rental pressures have eased slightly as national vacancy rates rise and rent growth slows. Rents are still up more than 50% over six years, adding about $245 to the median weekly rate. This increase has outpaced wage growth. Analysts link the rising vacancy rate to changing household dynamics, as more renters share homes or move in with family due to affordability constraints.