House prices forecast to record biggest decline in at least 40 years

Earlier this year, Cotality published the following chart showing the biggest national declines in dwelling values over the past 40 years.

Source: Cotality

According to Cotality, the largest decline was in 2017-19, when values fell by 8.2% amid credit tightening, fears over changes to negative gearing, and the banking royal commission.

Across the five largest capital city markets, Cotality’s daily dwelling values index has so far recorded a decline from its peak of 3.2%, led by Sydney and Melbourne.

Given that Australia’s regions and smaller capitals have recorded smaller falls, the picture at the national level would be less extreme.

ANZ Bank had forecast in June that dwelling values across Australia’s capital cities would fall by 2.1% in 2026. It now expects a fall of 4.3%, and ANZ economists Madeline Dunk and Adam Boyton say the housing market has softened more than the bank had expected in its last forecast.

“It is clear the combination of restrictive interest rates, recent tax policy changes and global uncertainty have dampened sentiment in the market”, they said.

ANZ also now forecasts that dwelling values across the nation’s capital cities will fall by 10.6% from peak to trough, with values in Sydney and Melbourne forecast to decline by up to 14.5% and 12.8%, respectively, peak-to-trough.

The problem facing the market is illustrated below by Shane Oliver at AMP:

Source: Shane Oliver (AMP)

Australian dwelling values have risen far beyond what buyers can afford with prevailing interest rates and lending rules.

With borrowing capacity constricted by the federal budget’s changes to negative gearing and capital gains tax, and mortgage rates set to remain elevated for the immediate future, values will need to fall sharply to bring the red line back into sync with the blue line.