What would make house prices fall?
Prices only fall when the system tightens
Synopsis
Australian dwelling values don’t fall because people want them to. They fall only when borrowing power contracts hard enough, and long enough, to seriously undermine demand. That requires higher interest rates, tighter credit, constrained leverage, weaker incomes and broken investor confidence. Even then, falling prices choke off supply, limiting how far values fall.
Introduction
I am often asked what it would take for housing values to fall across Australia in a meaningful and sustained way.
My short answer is always the same. Australian dwelling values fall only when borrowing power contracts hard enough, and for long enough, to seriously undermine demand.
At its core, this is not a story about general sentiment, migration, or supply. It is a story about interest rates and credit.
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I find it is often best to number things, so here are the seven things that would need to happen.
1. Interest rates would need to rise repeatedly and stay high
Interest rates matter because they destroy borrowing capacity.
As a rule of thumb, a 0.25% point rise in mortgage rates reduces maximum borrowing power by around 4% to 5%. Stack multiple rises together and purchasing power collapses quickly.
Australia absorbed rapid interest rate increases immediately after the Covid shock, yet prices did not collapse. Borrowers adjusted, buffers were absorbed, and expectations stabilised. Price actually rose!
For dwelling values to fall meaningfully, rates would need to rise several times again and remain elevated long enough to permanently reset what buyers believe is affordable.
Short-term pain does not do it. Prolonged pressure does.
2. Serviceability buffers would need to tighten materially
Rates are blunt instruments. Credit rules are sharper.
A lift in serviceability buffers would cut borrowing capacity overnight, even if interest rates stayed flat. That remains one of the fastest ways to force prices lower.
But buffers have not tightened. If anything, competition between lenders and political pressure around affordability are quietly pushing in the opposite direction.
Without tougher serviceability tests, higher rates tend to slow turnover rather than drive sustained price falls.
3. Loan-to-income limits would need to bite
Australia’s housing market is fundamentally a leverage story.
Prices rose not because incomes exploded, but because households were allowed to borrow higher and higher multiples of income.
To reverse that dynamic, lenders would need to clamp down hard on loan-to-income ratios. That would directly hit dual-income households and higher earners, precisely the cohorts that underpin demand in most metropolitan markets.
Until leverage is structurally constrained, prices are very likely to remain sticky.
4. Credit would need to become scarce, not just expensive
There is a crucial distinction between expensive credit and scarce credit.
Expensive credit slows buyers. Scarce credit removes them.
For prices to fall materially, lenders would need to pull back from investors, high-LVR borrowers, self-employed applicants, and households relying on multiple tentative income streams.
Right now, competition remains strong and non-bank lenders are filling gaps. That keeps demand alive, even at higher rates.
Housing downturns only bite when credit availability shrinks.
5. Incomes would need to stop offsetting rate pain
Borrowing capacity is a moving target. Higher rates reduce it. Wage growth restores it.
So far, income growth has cushioned the blow from higher interest rates just enough to prevent a deeper correction. For prices to fall, borrowing power would need to shrink faster than incomes can compensate.
That implies weaker wage growth, fewer hours worked, or rising unemployment, ideally all three.
Without that combination, demand bends but does not break.
6. Investor confidence would need to break
Investors do not sell simply because yields are tight.
They sell when negative cash flow meets falling prices, when holding no longer feels defensible and refinancing becomes harder.
Higher interest rates alone do not trigger exits. Higher rates combined with tighter credit and declining equity do.
Until that equation turns decisively negative, investors tend to sit tight.
7. Forced selling would need to become widespread
Distress does not cause housing downturns. It accelerates them.
Forced sales rise only after borrowing power collapses, prices soften, and confidence cracks. Without that sequence, mortgage stress remains largely hidden.
Australia - for now - is nowhere near a national forced-selling cycle.
The part most people miss
Even if all of the above occurred and dwelling values began to fall, there is a powerful stabiliser built into the system.
Falling prices kill housing supply.
This is where it helps to separate two very different problems.
The affordability crisis is about access to a financial asset, who can and cannot buy property. It is politically loud, emotionally charged, and increasingly frustrated.
The shortage crisis is about access to housing itself, roofs over heads. This is an existential issue, recognised globally as a basic human right.
As recently noted by my colleague, Robert Sobyra, here is the uncomfortable truth. These two crises pull in opposite directions.
New homes are built only when people can pay more than it costs to deliver them. When prices fall below development costs, projects stop. Supply stalls. Shortages worsen.
This relationship is well established. Dwelling supply accelerates when prices rise and decelerates when prices fall. That is why downturns tend to be self-limiting.
Falling prices choke off new construction, tighten future supply, and ultimately place a floor under dwelling values.
That is why housing downturns in Australia are usually shallow compared to the gains that preceded them, and why sustained price collapses are rare without a genuine credit shock.
Prices do not fall because people want them to. They fall only when the maths changes, and they stop falling when supply does.
End note
Take these factors together and one conclusion stands out. The housing market is unlikely to fall far, but it is also unlikely to run hard.
The same forces that limit price declines also cap upside. Higher rates, tighter credit and stretched affordability mean the boom conditions of recent years are unlikely to repeat.
Beyond 2026, Australian dwelling price growth looks more pedestrian than spectacular.
Too pessimistic? Perhaps? But it is often said that a pessimist is a well-informed optimist.