National home prices have fallen for a fifth straight month, data from realestate.com.au shows. The spring selling season will be an important test for the market.
National home prices declined 0.2% over the month and are now 2.7% below their March 2026 peak according to the latest realestate.com.au Home Price Index.
Despite the recent falls, prices remain 1.8% higher than a year ago and 27.5% higher than five years ago, though annual growth is moderating sharply.
Home prices are likely to fall further over the coming months, particularly across the capital cities.
Inflation has increased the risk of another interest rate rise
The RBA left the cash rate unchanged at 4.35% in August, following 75 basis points of increases earlier this year. The Bank has made clear that inflation remains too high and that it remains concerned about upside risks.
Higher interest rates have already reduced borrowing capacities and weakened housing demand, while the latest inflation data has increased the possibility that interest rates lift again before the end of the year.
Headline CPI inflation eased from 3.8% to 3.5% year-on-year, but underlying inflation was stronger than expected during the month.
The inflation result prompted financial markets to increase expectations of another rate rise. Market pricing now points to a high probability of the cash rate reaching 4.60% before the end of the year.
But one monthly CPI print, particularly given the relatively short history and volatility of the monthly series, likely isn’t sufficient. The most important number is now the September quarter trimmed mean CPI.
Another rate increase would further reduce borrowing capacities, while continued uncertainty around the peak in interest rates may encourage some prospective buyers to remain cautious until there is greater clarity around financing conditions.
Australian home prices have now fallen for five consecutive months, as the cumulative impact of higher interest rates increasingly flows through to housing demand.
Budget tax changes are also likely impacting buyer demand, and ongoing price falls could be driving some to delay purchasing until prices stabilise.
Impact of changes to negative gearing and capital gains tax
The full effect of the budget changes on housing demand remains difficult to isolate.
New measures announced in this year’s federal budget restrict negative gearing to new housing only, while the capital gains discount will be abolished from 1 July 2027, with the old pre-1999 inflation-linked indexation system applying instead.
The tax changes are likely playing a role in the current downturn, particularly through investor demand.
Since the budget, we’ve seen a significant fall in investor search activity on realestate.com.au, and that’s increasingly being corroborated by lending data, with investor borrowing pulling back.
But interest rates remain the dominant headwind. Higher rates reduce borrowing capacity for owner-occupiers and investors, whereas the changes to negative gearing and capital gains tax are much more concentrated in the investor segment.
Though the combination matters and tax changes are an additional headwind, for investor demand, but also confidence.
Still, it is too early to attribute a specific share of recent home price falls to those reforms. At a time when higher rates have already reduced the amount buyers can borrow, pressure on investor demand means less competition for properties and can add to downward pressure on prices.
Market outlook
Higher interest rates have already reduced borrowing capacities and weakened housing demand, while the latest inflation data have increased the possibility that interest rates lift again before the end of the year.
The spring selling season will be an important test.
The key variable will be the balance between the flow of new listings coming onto the market and the depth of buyer demand. If the usual spring increase in listings occurs while borrowing capacities remain constrained, buyers will have more choice and vendors may face greater competition, creating additional downward pressure on prices.
Conversely, if listings remain relatively constrained, this dynamic could place a floor under prices in many markets.
More broadly, Australia continues to face a structural shortage of housing relative to population growth, while rents and construction costs remain elevated. Those conditions support the underlying value of established housing and make the current cycle very different from a downturn characterised by widespread excess housing supply.
The more significant downside risk would be a combination of restrictive interest rates and a deterioration in labour market conditions. Employment and household income ultimately determine borrowers’ ability to service their mortgages, and a substantial rise in forced selling would change the character of the downturn.
At present, the evidence is more consistent with an orderly adjustment to reduced borrowing capacity than a disorderly housing correction.