House prices fall for seventh consecutive month as interest rates dent demand

Australian capital-city home values fell 1.4% in October, extending the national capital-city decline to seven straight months. Since March, combined capital-city values have dropped 8.1%. The speed and length of the fall matter because they show that weaker demand is spreading across the market rather than remaining isolated.

The monthly result reflects a sharp change from the recent boom. Brisbane and Perth led October’s declines, while values across the state and territory capitals fell together. Cotality’s Tim Lawless said the downturn had become broad-based. Four interest-rate increases this year have made mortgages more expensive and discouraged buyers.

The pace is historically fast, but the article links that partly to how strongly prices rose beforehand. Most homeowners still have sizeable gains. Economists expect further falls as rates rise, with Morgan Stanley forecasting peak-to-trough declines of up to 15%, although Sydney and Melbourne may be close to bottoming.

The property downturn is shifting toward Australia’s mid-sized state capitals. Brisbane and Perth recorded the largest declines in October, while Adelaide is also clearly weakening. This matters because Sydney and Melbourne initially attracted most attention, but the correction is now broad-based across several capital-city markets.

Cotality says the shift follows extreme growth in the mid-sized capitals over the past six years. Their larger earlier gains left more room for prices to retreat when borrowing costs rose. Virtually every suburb across Brisbane, Perth and Adelaide recorded a value drop over the past three months. Combined capital-city values fell 1.4% in October.

Sydney and Melbourne have not escaped the downturn, but Peter Esho said their markets were close to bottoming. He described the mid-sized capitals as being at an earlier stage. The pattern suggests the timing and depth of declines may differ between cities, depending partly on their previous price growth and current buyer sentiment.

Mortgage interest is the extra cost borrowers pay for using a lender’s money. When rates rise, the same loan produces larger repayments. Lenders also assess whether applicants could manage those repayments, so a buyer may qualify for a smaller loan than before. This directly reduces purchasing power and affordability.

For example, a household that could previously afford a particular mortgage may now face repayments above its budget after several rate increases. It might delay buying, seek a cheaper property or leave the market. The article links four interest-rate hikes this year to weaker demand and says a fifth was widely expected.

Reduced borrowing capacity means fewer buyers can compete for homes. Sellers may then need to accept lower prices, especially when affordability was already difficult. Tim Lawless called high interest rates the most significant downside influence. Investor demand has also weakened after government tax changes, adding to the pressure on prices.

A housing-market correction is a period when prices move down after rising unusually strongly. It can reflect weaker demand, reduced affordability or changing borrowing conditions. The term does not automatically mean a collapse. It describes the market adjusting after an earlier rise, often as buyers become less able or willing to pay previous prices.

Brisbane, Perth and Adelaide recorded extreme growth over the past six years. Their prices then began falling as mortgage rates rose and affordability pressures intensified. Cotality reported that virtually every suburb across those three cities had recorded a value decline over the previous three months. That breadth is why Tim Lawless described them as being well and truly in a correction.

The correction is part of a wider capital-city downturn. Values across the capitals fell 1.4% in October and 8.1% since March. The earlier boom means many owners still hold sizeable gains. However, the mid-sized capitals may face more adjustment because their recent growth was especially strong.

A negative wealth effect occurs when falling asset values make households feel poorer, even if their incomes have not changed. Homeowners may become more cautious because their property is worth less and their financial cushion appears smaller. They may delay renovations, large purchases or other spending, reducing demand across the economy.

The article describes the current downturn as a normal housing cycle driven by interest rates. Peter Esho said higher rates were creating a negative wealth effect and denting sentiment because real estate is a sentiment asset. As prices fall, concern about future losses can reinforce caution among owners and potential buyers, even when many owners still have sizeable gains.

Esho did not expect the price falls to become systemic. He said that would require conditions such as widespread difficulty borrowing, like in the United States during the global financial crisis, or a surge in unemployment. The likely effect is weaker confidence and activity, rather than an automatic economic collapse.

Home prices reflect what buyers can borrow and are willing to pay for ownership. Rents reflect demand for available homes and the supply of rental properties. Therefore, prices can fall when mortgage rates weaken buyers, while rents remain elevated if many people still need rental housing. One market does not instantly determine the other.

Australia’s rental rates rose more than 50% over six years, adding about $245 a week to the median rental rate. Recently, national vacancy rates increased and rent growth slowed. The article partly links that change to affordability-driven household shifts. More renters are sharing homes or moving in with family, reducing the number of separate households seeking rentals.

Higher vacancy means more rental homes are available relative to renters. Landlords may then face greater competition and have less scope to raise rents quickly. The article describes pressures as easing slightly, not disappearing. Rents remain high, but continued household sharing and rising vacancies could moderate future rent growth.

An interest rate is the percentage cost paid when money is borrowed, or the return received when it is saved. The Reserve Bank uses its policy decisions to influence financial conditions across the economy. Higher rates generally make loans more expensive and discourage borrowing and spending. Lower rates generally make borrowing easier and can support demand.

When the Reserve Bank raises rates, mortgage repayments increase and lenders may approve smaller loans. Buyers then have less purchasing power, which can reduce competition for homes. The article reports four rate hikes this year and says a fifth was widely expected. It identifies high rates as the most significant downside influence on housing.

Rate changes also affect broader demand and inflation. Higher borrowing costs can slow spending and weaken price pressures, though their effects take time. In housing, the current result is falling demand and declining values. The article says most economists expect further property-price falls as rates climb, with Morgan Stanley forecasting declines of up to 15% from peak to trough.