What a fall in house prices would mean for Australians

Property prices are under more scrutiny than ever before.

Following a shake-up to negative gearing and the capital gains tax (CGT) discounts, the housing market has stalled and auction clearance rates are down.

There’s some consternation among investors and home owners about a decrease in property values — and their concerns are backed by the big banks.

NAB has predicted a 2 per cent drop across major capital cities, while Commonwealth Bank has revised their growth estimate to 3 per cent, down from 5 per cent.

Prices are already sliding, with a reported 1.2 per cent decrease in Sydney last month alone.

Investment bank Morgan Stanley has predicted house prices could fall between 5 and 10 per cent, which it described as “one of the largest price corrections over the past 40 years”.

So, what would a 10 per cent fall in house prices mean for Australians?

First, we need to look at how house prices have boomed over the decades.

This chart, using data from the Australian Bureau of Statistics, captures average dwelling prices in Australia dating back to 1999.

Average house prices have increased by more than 400 per cent since 2000, rising about 8 per cent per year.

It’s obvious prices have gone up, but let’s zoom in to better understand the market’s journey to this point.

We’ll start in 1999, when then-prime minister John Howard introduced the Capital Gains Tax (CGT) discount.

The 50 per cent discount allowed taxpayers to reduce their taxable capital gain by half rather than adjusting for inflation.

We’ll note here that in 2000 the average cost of a house in Australia was between $205,000 and $215,000.

In early 2001, with house prices gradually ticking up, the Howard government doubled the First Home Owner Scheme from $7,000 to $14,000 until the end of the year.

The market continued to rise steadily throughout the mid-2000s, where house prices were averaging between $364,000 and $391,000.

We’re going to zoom our chart out a little bit more here.

Because in the mid-2000s, the market changed in a big way.

In 2008, the global financial crisis (GFC) hit.

In a bid to prevent an economic recession, one of the measures the Rudd government enacted during this period included tripling the First Home Owner Boost to $21,000 to stimulate the residential construction market.

Unsurprisingly, the GFC is where we see our first sizeable dip in the market in our chart.

By the time 2010 rolls around, the market was on the up and the average cost of a house surpassed half a million dollars.

Australia’s housing market boomed during this time thanks to a cocktail of negative gearing, high population growth from migration, low interest rates and tight housing supply conditions.

Across the next 10 years, the Reserve Bank of Australia (RBA) gradually reduced the cash rate target from 4.75 per cent in late 2010 to just 0.25 in March 2020.

By early 2020, house prices were averaging between $694,700 and $738,900.

Let’s zoom out again, because things are about to change in a big way.

When COVID-19 hit, the pandemic dramatically reshaped Australia’s housing market.

Several factors, including record-low interest rates and economic stimulus, helped property prices surge.

It’s worth noting here, too, that property prices skyrocketed during the pandemic when immigration was at a historic low.

The Morrison government introduced the HomeBuilder scheme — a limited-time $25,000 grant to build a new home or substantially renovate an existing home.

By late 2024, the average price of a house in Australia surpassed the $1 million mark.

In October 2025, the Albanese government expanded the 5 per cent deposit scheme, which led to a jump in first home buyers entering the market.

We’ve now caught up to 2026, where the federal budget revealed the 50 per cent CGT discount would be replaced with a discount based on inflation.

So if Australia were to see a 10 per cent drop in house prices, what would that look like?

It means prices would only return to where they were in late 2024.

Economist James Graham from the University of Sydney says property prices are still expensive, even with a drop in value.

“House prices have been growing rapidly year on year for at least four or five years,” Dr Graham says.

“10 per cent sounds large and it is for some people, but it’s not that large in the grand scheme of ongoing house price growth that we’ve seen.”

Independent economist Nicki Hutley says Australia is “one of the least affordable places in the world” when it comes to house prices in terms of price to income ratio.

The median house price is now 8.9 times the average income, according to Cotality.

“The idea behind the tax changes is to make fewer investors compete with particularly first home buyers so that the house prices will come down and make them more affordable.”

To get a sense of those who will be impacted most by the changes, we spoke to a prospective buyer, a new home owner, and someone hoping to sell.

First up is our prospective buyer: Zakariah Northcott.

Mr Northcott lives in Brisbane, one of the fastest growing housing markets in the country.

He describes a fall in prices as a “market correction”.

The 25-year-old works as a customer service manager and says at times he has felt hopeless saving for a home deposit with his partner.

Over the last six years, house prices have more than doubled in Brisbane.

“It feels like the game’s rigged against us,” he says.

“Houses need to fall for it to be a reasonable thing for anyone to buy a house.

“If house prices continue to go up at the rate they are, it doesn’t matter if we save till we’re 45, we’ll never have a big enough deposit.”

Mr Northcott says at present all he can afford is a one-bedroom apartment.

“We need more than one bedroom so that we can have a family, have space,” he says.

“If house prices don’t fall, that might mean that we just flat out don’t get to have kids.

“It’s our life goal. We’ve always wanted a family, a home, the same thing that our parents and grandparents had.”

On the other side of the country, in Perth, we have our new home owner — Daniel Jones.

Mr Jones says “distorted” house prices need to fall even if his home may end up being worth less.

The 27-year-old bought his two-bedroom apartment with his wife last September for about $725,000.

The property was smaller than the couple would have liked as new parents but decided to enter the market to stay close to family in Perth’s inner western suburbs.

He says the increase in prices over the last two decades is unsustainable and locking younger people out of home ownership.

“It’s becoming an investment casino rather than what it should be, which is a place for people to live,” he says.

Ms Hutley says for most who have bought over the last few years, a fall in house prices by even 5 per cent would leave the value of their home the same from when they bought it.

Since the COVID-19 pandemic house prices in Australia have increased by more than 50 per cent.

Ms Hutley says negative equity, which is when a home is worth less than what is owed to the bank, is an increased risk with house prices falling.

“There is a risk young new home buyers who’ve got higher levels of debt, if they lose their job and they have to sell and the house price is worth less, then that’s a big problem,” she says.

“Not so much for the banks because they have mortgage lenders insurance, but for a person to walk away with less than they started is problematic.

“We’re talking about a very small percentage of the population there, but nevertheless, for those who have faced that risk, it is concerning.”

Mr Jones says he’s not afraid of the risks of falling house prices for new buyers such as negative equity.

He says his property has already increased in value by at least 10 per cent.

“It’s not nice for people who end up with negative equity. But in order to reverse that discount, unfortunately some people have to lose out,” he says.

“I have very strong views on this. I think that it’s long overdue.”

Then there are those who are looking to sell. Larissa Ferguson was hoping house prices would not fall after she spent the last three years building her three-bedroom home in Victoria Point, in Brisbane’s south-east.

The single mother of three says she planned to sell her home in the next year to buy a bigger house for her family, but those plans are now on the backburner.

Ms Ferguson says the total cost of her home was about $830,000.

“With housing prices possibly going down, I might not be able to get what I had hoped for which will impact me getting something big enough for us,” she says.

Dr Graham says falling house prices impact the entire market, not just the home a person is trying to sell.

“If all houses are falling by 10 per cent, your house falls by 10 per cent, but so does the house that you want to buy.

“So for that person, there’s not really any worse off than they were a month or two ago.

“People sometimes forget that. They feel like they’ve lost wealth, but as long as what you want to do with the wealth is just buy another home, it’s kind of a wash.”

But Ms Ferguson says the combination of falling house prices and higher interest rates has elevated her fears of negative equity.

She already spends about half her income on her fortnightly mortgage repayments.

“If [house prices] do drop, then the money that I’d sort of made on my last property over the last 10 years will be unfortunately for nothing,” she says.

“That will have serious consequences for me financially and the kids if it does drop below what I’ve put in for it.”

Ms Hutley says to be cautious on house price predictions because they can be tricky to get right.

She says there are a lot of factors at play for the market to be contracting right now.

“Rising interest rates, the changes to tax treatment of investment properties, the stretching of valuations of the house price to what people earn,” she says.

“All of those factors are putting downward pressure on house prices.”

The prime minister has acknowledged the consternation among investors and home owners, but says the changes are about “making the system fairer”.

“Everyone has acknowledged during this debate that the housing system is broken,” Anthony Albanese told 7.30 on Monday night.

“Therefore we had to do something about it.”