Former treasury economist Leith Van Onselen has issued a stark warning that Australia's housing market is on the brink of its most severe correction in four decades. He cites rising interest rates, a surge in housing supply, and a weakening employment landscape as creating a 'perfect storm' for property prices.
Perfect Storm Brewing
Mr Van Onselen explained that conditions are now aligned for a broad downturn. Housing supply is increasing, sales are declining, and unemployment is expected to climb as the Reserve Bank of Australia (RBA) continues its battle against inflation. 'We've just had three consecutive rate hikes, with rates back to last year's peak before the RBA started cutting in February last year,' he noted. 'Markets are still predicting at least one more rate hike.' The RBA's hawkish commentary during Tuesday's rate hike underscored its deep concern over inflation.
Comparisons with New Zealand and Canada
Mr Van Onselen suggested Australia is likely to follow the trajectory of comparable economies such as New Zealand and Canada, where house prices have already fallen by around 20 per cent. The RBA raised the cash rate by 0.25 percentage points to 4.35 per cent last Tuesday, marking the third increase this year. This move was driven by persistent inflation, partly attributed to the Iran conflict. Westpac forecasts two further rate hikes in August and September.
Market Sentiment and Data
National auction clearance rates have dropped 10 per cent to 54 per cent compared to the same period last year, according to Domain data. Property market expert Catherine Cashmore of Land Cycle Investor has long predicted a downturn between late 2026 and 2027. She noted that the latest rate hike has rattled the market. 'I've been hearing from people selling in Perth that the market is softening there,' she said. 'A similar report came from Brisbane, where someone just dropped their home price. It all feels a little dismal.' Ms Cashmore warned that Australia is not merely entering a property price downturn but heading into a recession. 'We're heading into a full-blown recession, with property prices dropping, businesses closing, and panic in the stock market,' she added.
Slowing Growth Across Cities
AMP senior economist Shane Oliver observed that the housing market is already losing momentum. Prices rose just 0.3 per cent in April, the slowest increase in over a year. 'Prices fell in Sydney and Melbourne, and while Brisbane, Adelaide, and Perth remain strong, they are experiencing slowing growth too,' he said. The slowdown reflects a combination of rate hikes, buyer uncertainty linked to the Iran War, and increasing uncertainty around property tax treatment ahead of the budget, along with poor affordability. Oliver forecasts house price growth will slump from 8.6 per cent in 2025 to just three per cent in 2026, with a real risk of decline if interest rates stay higher for longer and the oil shock persists.
Sydney and Melbourne Under Strain
Domain chief economist Nicola Powell highlighted that Sydney and Melbourne are most sensitive to interest rate movements. 'Sydney and Melbourne are showing the clearest signs of strain, with price growth stalling or reversing as affordability pressures bite,' she said. Sydney house prices stalled over the March quarter, edging down 0.04 per cent to $1.79 million, ending a three-year run of uninterrupted growth. Melbourne house prices declined 0.6 per cent to $1.08 million, the first fall in 1.5 years, ending a five-quarter growth run. This also marks the end of the longest uninterrupted upswing since 2020-21, highlighting how quickly Melbourne responds to shifts in borrowing conditions.
