Australia’s housing market edges towards downturn as rate pressure builds

Australia’s housing market appears to be entering a softer phase, with rising interest rates, worsening affordability and slowing buyer demand beginning to weigh on capital city values after several years of extraordinary growth.

New analysis from Cotality suggests the nation may be on the cusp of another housing downturn, with Sydney and Melbourne already showing early signs of sustained declines and conditions easing across several other capital cities.

While the shift is unlikely to resemble the sharp corrections seen during previous tightening cycles, property analysts say the market is increasingly transitioning away from broad-based growth towards a far more selective environment where asset quality, owner-occupier appeal and land content matter more than ever.

Rate pressure intensifies

Cotality Research Director Tim Lawless said Australia’s combined capital city housing markets have historically recorded 10 downturns lasting at least three months over the past four decades, typically triggered by a combination of higher interest rates, affordability pressures, tighter lending conditions and weaker sentiment.

“Sydney and Melbourne are already five months into the early phases of decline, while growth is slowing across the mid-sized capitals,” Mr Lawless said.

“Listings are picking up as demand softens, interest rates are rising while affordability and serviceability pressures are biting.”

The combined capital city Home Value Index rose just 0.2 per cent in April, continuing a clear loss of momentum that began well before the Reserve Bank’s latest tightening cycle accelerated.

Mr Lawless said the slowdown had been amplified by the 75 basis points of rate hikes delivered so far this year, alongside expectations that further increases may still be ahead.

“This trend has been amplified by seventy-five basis points of rate hikes so far this year and the chance of another hike, or hikes, later in the year,” he said.

Westpac added further uncertainty to the outlook on Friday (8 May) after revising its cash rate forecasts, pushing its expected timing for two additional rate hikes back to August and September.

While the bank now expects the Reserve Bank to pause in June, it still believes the cash rate could reach 4.85 per cent by the end of 2026.

That contrasts with Commonwealth Bank and ANZ, both of which continue forecasting rates to remain on hold for the rest of the year, although each acknowledges inflation risks remain elevated.

Borrowers increasingly stretched

The prospect of higher rates is becoming increasingly significant for households already facing financial pressure.

Canstar research shows approximately 13 per cent of big four bank mortgage customers currently have no repayment buffer available, including offset account balances.

Canstar’s Data Insights Director, Sally Tindall, said even modest further increases could create significant stress for some borrowers.

“The worrying part of this debate is how little breathing room some borrowers have left,” Ms Tindall said.

“With around 13 per cent of big four bank customers sitting with no repayment buffer, even one further rate hike could be enough to tip some households into the red.”

At the same time, stronger borrowers remain relatively well insulated. Westpac data shows 37 per cent of its mortgage accounts are more than two years ahead on repayments, while Commonwealth Bank customers average 35 payments in advance.

Cotality noted mortgage arrears remain relatively low nationally, sitting at around 1.45 per cent at the end of last year, below previous peaks recorded during earlier rate cycles.

Mr Lawless said strong labour market conditions and stricter lending standards introduced in recent years should help limit widespread distress.

“Mortgage repayments are typically prioritised, with borrowers more likely to adjust spending elsewhere before missing a payment,” he said.

Supply conditions begin to loosen

Another major shift underway is the gradual easing in supply conditions that helped fuel rapid price growth over recent years.

Nationally, 39,319 properties were newly listed for sale over the four weeks to early May, sitting 4.7 per cent above the five-year average.

SQM Research data also showed total residential listings rose 3.5 per cent in March to 234,734 dwellings nationally, reflecting a continued recovery in stock levels following the summer slowdown.

Sydney listings declined 3.1 per cent for the month, while Melbourne listings were broadly flat but remain 10 per cent higher than a year earlier.

Perth stock levels also continued rising month-on-month, although supply remains significantly tighter than historical norms.

Importantly, the rise in listings appears to be driven more by softer buyer demand than a major surge in distressed sellers entering the market.

Vendor discounting has also started rising, with median discounting across the combined capitals increasing to 3.1 per cent as negotiating conditions slowly improve for buyers.

Melbourne becomes a ‘selection market’

Despite softer conditions, some markets are still expected to outperform, particularly in Melbourne where buyers are becoming increasingly selective.

Laura Scott, Principal Licensee (Melbourne) at aussieproperty.com, said the city was rapidly evolving into a “selection market” where not all suburbs or asset types would perform equally.

“Overall, Melbourne increasingly looks like a ‘selection market’,” Ms Scott said.

“Asset quality, land content and owner-occupier appeal are becoming far more important than simply being in the right city.”

Ms Scott said family-oriented middle-ring suburbs with limited housing supply and strong owner-occupier demand were likely to remain more resilient than high-density apartment precincts.

Among the areas she believes could continue outperforming are Bentleigh and Bentleigh East, Mount Waverley and Glen Waverley, along with Brunswick East, Northcote and Preston.

“Education driven demand remains extremely resilient, particularly among owner-occupiers,” she said of Melbourne’s eastern school-zone markets.

She also highlighted Williamstown and parts of Newport, citing bayside appeal and relative affordability compared with Melbourne’s traditional blue-chip eastern suburbs.

Meanwhile, affordability-driven migration continues supporting parts of Frankston and the broader Mornington Peninsula corridor, although Ms Scott cautioned growth rates may moderate after several years of exceptionally strong gains.

Her comments reflect a broader national trend emerging across Australian housing markets as conditions soften. Broad-based price surges are fading, but well-located, supply-constrained family housing continues to attract strong buyer competition.