Australian home prices fall as experts predict slump could last a year and cut values by 10%

Lead

Home prices in Australia's capital cities have begun to fall, with experts predicting the decline could last at least a year and wipe as much as 10% from values, according to recent data and forecasts.

The median capital city home price fell in May, the first decline since January 2025, as high interest rates and inflation stretched buyer budgets, Cotality reported on Monday. Auction success hit a new low for the year.

Sydney and Melbourne led the weakness, with dwelling values falling 0.9% and 0.8% respectively in May. Values also slipped in Canberra, down 0.2%, according to Cotality data. National home values flatlined in May, with slow growth in regional areas outweighing metropolitan declines.

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Domain, the real estate platform, has published housing price forecasts for the next financial year, tipping substantial falls for the Sydney and Melbourne markets. The company forecasts that up to $122,000 could be wiped off the value of the typical Sydney house over the next year, while Melbourne's median house price could drop below $1 million.

Cotality research director Tim Lawless said the broad trend was one of the housing market losing steam, driven by several headwinds hitting at once. He cited affordability challenges, 75 basis points of interest rate hikes, a global oil crisis affecting confidence, and disincentives for investment from the federal budget.

The slowdown is also showing up in sales activity. Nationally, the estimated number of home sales over the past three months was tracking 2.2% lower than a year ago and 4.1% below the five-year average.

Auction success hit a new low for the year in the final week of May, with just 54.5% of homes sold after being listed for auction, according to Cotality's preliminary national clearance data.

Experts have predicted the decline could last at least a year. Tim Lawless said the capital cities' price fall in May could be the start of a significant year-long decline, even in the smaller cities that had enjoyed price booms.

Key Claims

• Up to $122,000 could be wiped off the value of the typical Sydney house over the next year, according to Domain forecasts.
• Melbourne's median house price could drop below $1 million, Domain predicts.
• National home values flatlined in May, with Sydney and Melbourne leading declines at 0.9% and 0.8% respectively, as reported by Cotality.
• Home sales over the past three months were tracking 2.2% lower than a year ago, according to Cotality data.
• Auction clearance rates hit a new low for the year in the final week of May, with just 54.5% of homes sold, according to Cotality's preliminary data.
• CBA economists predicted values in 2026 would eventually fall by 6% to 7% in Sydney and Melbourne.
• Analysts at Morgan Stanley have said values could slide 10%.
• The median capital city home price fell in May, the first decline since January 2025, Cotality reported.

Perspectives

Domain: The real estate platform forecasts substantial falls for Sydney and Melbourne, with units expected to outperform houses in most markets. Domain's chief residential economist Nicola Powell said the housing market was no longer moving in lock-step around the country, with more affordable segments and mid-tier cities holding up.

Cotality: Research director Tim Lawless attributed the decline to multiple headwinds, including interest rate hikes, affordability challenges, a global oil crisis, and tax changes. He noted that while cheaper segments have been more resilient, the overall trend is one of the market losing steam.

First-home buyer concerns: There are fears that first-time buyers with tiny deposits may find their mortgages are worth more than their homes, as prices fall. Some Liberal MPs, including Andrew Hastie, have raised alarms about negative equity. However, Gerard Burg, Cotality's head of research, said first-home buyers are most likely purchasing in the bottom quarter of the market, where values have been more stable.

Economists: CBA economists predicted a 6% to 7% fall in Sydney and Melbourne values in 2026, while Morgan Stanley analysts suggested a 10% slide.

Reserve Bank of Australia: The Reserve Bank hiked rates in February, March and May, returning the official cash rate to 4.35%, which has lowered borrowing power for potential buyers, as reported by Cotality and Domain.