Australia’s housing market is experiencing a decline, but history suggests this is a routine occurrence, according to new insights from Domain.
After the government implemented adjustments to negative gearing and capital gains tax, along with three consecutive interest rate increases this year, housing values in major cities have started to decline.
In such times, both buyers and sellers face uncertainty: How steep will the price drops be? Should sellers delay their plans, or is now the opportune moment for buyers to invest? When will the market hit rock bottom?
Domain’s recent analysis indicates that examining historical data from the last thirty years could offer some clues to these questions.
Just another downturn?
This marks the ninth downturn for the market in three decades, yet Domain’s FY2027 Forecast Report identifies a recurring theme: each of the previous eight slumps was followed by a recovery, with prices eventually reaching new heights.
For prices across the combined capitals to fall back to their previous low in March 2023, they’d need to drop by around 22.8 per cent, the analysis found.
Their current forecast has Sydney house prices falling by as much as 7 per cent and Melbourne by as much as 8 per cent over the next financial year — nowhere near enough to undo the gains of the past three years.
The analysis highlighted that what stood out about Australia’s last eight downturns wasn’t the falls themselves; it was how contained they had been. In every single one, the worst annual fall stayed under 8 per cent.
The upswings were also telling, with Australia going through nine separate growth phases since 1995, lasting an average of just under three years but delivering average growth of 32.3 per cent.
The most recent upswing, which lasted three years and is now ending, saw house prices rise by 29.6 per cent.
“While the latest slowdown comes amid heightened focus on government policy, three decades of data show housing downturns have occurred under all policy settings, and have consistently been driven by interest rates, supply, credit conditions and shifts in confidence,” the Domain analysis reads.
“Across that period, Australia has recorded eight completed downturns — each followed by a recovery that not only reversed losses but pushed prices to new highs.”
How long will the dip last?
While you might need a fortune teller to predict the lowest low, Domain’s historical analysis suggests things might start heading up next year.
“Downturns have typically been short and contained, averaging a 2.9 per cent decline over around eight months,” the analysis found. “By contrast, upswings have been longer and significantly stronger, delivering 32 per cent growth on average over nearly three years.”
Domain chief residential economist Nicola Powell said the underlying rhythm of the market hasn’t changed.
“Downturns can feel sharp in real time, but historically they’ve been short and shallow, and have not unwound the gains that preceded them,” she said.
“When the interest rate cycle turns, demand that has been sitting on the sidelines tends to return quickly, bringing the next phase of growth forward.”
How to tell when the market is on the upswing
So what should buyers and sellers be watching for?
Interest rates are the first and most obvious signal, according to REA Group senior economist Anne Flaherty.
“Once we’ve seen that rates have hit the peak and the overwhelming consensus is that the next move is down, that normally signals a turning point,” she told SBS News, adding that undersupply and slow construction across most capitals are keeping confidence in the market’s medium-term trajectory.
Auction clearance rates are another key gauge.
They’re currently sitting close to 40 per cent in capital cities, according to Cotality research this week, meaning fewer homes that have gone to auction have found a buyer.
Clearance rates above 60 per cent are typically seen as a mark of a balanced market.
“Once we start to see the clearance rates pick up, that’s a sign that buyers and vendors are more aligned and it’s also a sign that buyer demand is recovering,” Flaherty said.
“It’s also when we start to see more people turning up for open home inspections and more people searching and inquiring to buy property,” she said, noting that it typically takes longer for that interest to flow through into actual price growth.
Spring is likely to be the next real test, with winter being a traditionally quieter period for listings, Flaherty said.
By then — and with the dust from the federal budget settling — there should be a clearer idea of where buyer demand sits.