How far could property prices fall before years of gains disappear?

Australia’s declining property prices are impacting the psyche of all cohorts of the property market, from first home buyers to seasoned investors.

Just how concerned they should be will become clearer as the market stirred up by historic reforms to negative gearing and the capital gains tax discount play out.

The Federal Government was well within its rights to tackle a housing market that had soared out of reach of young Australians, and all sides of the political debate and demographics spectrum have their opinion on whether that approach was justified.

Regardless, property prices had undergone two decades of supercharged growth before the relatively modest declines of the past couple of months set in.

So to get a sense of how far property prices would need to fall to return to levels seen even in recent years, it’s worth examining the latest Cotality analysis.

A sense of perspective on the current scattered downturn – not all capitals are in decline – is drawn from the realisation that double-digit declines in home values would make little dent in the gains accumulated across mid-sized housing markets during Australia’s five-year housing boom.

Just how prices would need to drop to reach pre-Covid levels that would appeal hugely to first home buyers and much less to those with a portfolio built on capital growth performance varies widely.

Melbourne has relatively little buffer after years of subdued growth, while the mid-sized capitals of Perth, Brisbane and Adelaide would retain much of the value gained during their recent housing booms.

Cotality Head of Research Gerard Burg said with Sydney and Melbourne housing values already more than 5 per cent below their respective peaks, and Brisbane and Adelaide entering a modest downturn over the past two months, a deeper downturn could play out differently around the country.

“Markets such as Perth, Brisbane and Adelaide recorded exceptional growth over the past five years, giving them a more significant buffer against declines than cities where values have been comparatively flat.”

He said Melbourne had the least room to absorb further price falls after years of subdued growth, with dwelling values peaking at $840,000 in November 2025.

“Melbourne’s home values have recorded very little growth over the past five years, meaning a decline beyond 10 per cent would return values to pre-pandemic levels,” Mr Burg said.

“Conversely, even if Perth’s housing market fell 20 per cent from its peak, the median dwelling value would still be around where it was in April 2025 after recording one of the strongest growth cycles of any capital city.”

What would a downturn mean for your city?

Sydney

‍Already more than 5 per cent below its peak, Cotality noted that even a 20 per cent downturn would only take Sydney’s housing market back to around May 2021, highlighting the scale of the gains accumulated during the pandemic boom.

Melbourne

‍Melbourne has the smallest buffer of any major capital city, with a decline beyond 10 per cent returning dwelling values to pre-pandemic levels after five years of subdued growth.

Brisbane

‍Despite entering a downturn only two months ago, Brisbane could absorb a 20 per cent correction and values would still be around August 2024 levels after one of the country's strongest growth cycles.

Adelaide

‍Even a 20 per cent decline would only return Adelaide’s housing market to around April 2024, underlining the depth of its recent value growth.

Perth

‍Perth has the largest buffer of the major capitals, with a 20 per cent downturn returning dwelling values only to around April 2025 after the nation’s strongest recent growth cycle.

The negative equity risk

For all the attention on falling property values, the prospect of recent buyers falling into widespread negative equity remains unlikely.

New data from realestate.com.au, drawing on PropTrack’s Home Price Index and Housing Australia data, shows most first-home buyers who entered the expanded 5 per cent deposit scheme have not fallen into negative equity.

Of the roughly 48,000 properties purchased through the scheme since its expansion last October, just 87 households were in negative equity at the time of the analysis – less than 0.2 per cent of first home buyers who used the scheme.

That is despite almost half of first-home buyer households being in the (SA4) regions where current equity is 5 per cent or less.

A household can have less equity than the deposit it initially contributed without necessarily being in immediate financial difficulty. Provided borrowers continue to meet their repayments, the data suggests there should not be significant implications for first home buyers, the broader housing market or the economy.

The geography of equity movements is also revealing, with regional owners with more breathing space than their city counterparts.

Queensland Outback recorded the highest equity for first-home buyers at 14.2 per cent, followed by Western Australia Outback at 12.7 per cent and South Australia Outback at 12.2 per cent.

At the other end of the spectrum, Sydney – Eastern Suburbs recorded just 0.8 per cent equity, followed by Melbourne – Inner East at 1.9 per cent and the Mornington Peninsula at 2 per cent.

This is partly because first home buyers tend to target more affordable properties, including in regional markets that have subsequently experienced stronger price growth.

Property’s beneficiaries and losers

Simon Gold, Director of Taxation – NSW, Australasian Taxation Services, said around two-thirds of Australian properties were owned by owner-occupiers, meaning the majority of households are exposed to changes in property values.

“No one wants to see the value of their own net worth decrease, but they are also not necessarily going to sell because of it,” Mr Gold said.

“Upsizing, or for that matter downsizing, within the same market means you may get less for your own property, but so too will the cost of the next property you are buying.”

For homeowners who are not forced to sell, a decline in prices can be uncomfortable without necessarily becoming financially destructive. The problem becomes much more acute for highly leveraged borrowers who need to sell, refinance or otherwise access their equity while prices are falling.

Investors face another set of considerations. Falling values can reduce the equity available to fund another purchase, while weaker rents or prolonged vacancies can compound the pressure on cash flow. But investors who are financially comfortable and focused on long-term returns are not necessarily forced sellers either.

The governments at state and federal level setting housing policies in motion are also impacted.

Property transactions generate significant revenue for governments through stamp duty, while changes in property values can ultimately affect future capital gains tax collections, GST flowing to the states and land tax revenues.

Mr Gold said the impact on government revenue would be worth watching as the market adjusts.

“Apart from the obvious, being the government’s desire for increasing home ownership, it will be interesting to see how this plays out with respect to revenue collection, be it future capital gains tax, GST (that ultimately flows onto the states), as well as state-based stamp duty and land tax collections.”

He also pointed to potential implications for superannuation, including the downsizer contribution, if changing property returns influence how Australians structure their investments.

The current market softening has set alarms ringing in some quarters but its practical impact depends on when someone bought, how much they borrowed, where the property is located and whether they need to sell.

For prospective buyers, lower prices could eventually represent an irresistible opportunity.