Australia’s sudden housing chill seeps into economy

SYDNEY – Australia’s housing market is suffering its worst slowdown since the Covid-19 pandemic, as rising borrowing costs and a sharp reversal in tax breaks shake confidence in a normally reliable source of economic growth.

Buyers and sellers alike have suddenly stepped back as house price appreciation no longer seems inevitable, a sea change in mood after decades of inexorable gains that turned Australian property into some of the world’s most expensive.

With home prices in Sydney and Melbourne down nearly 5 per cent so far in 2026, the chill is evident in fewer people at open houses, tumbling auction clearance rates, a plunge in loan inquiries and a slump in property sales.

It is a sign of tougher conditions ahead for the broader economy, with real estate agents, removalists and tradespeople starting to see less work, while state governments brace themselves for large write-downs in vital stamp-duty revenue.

The New South Wales government in June cut its stamp duty forecasts by A$5.3 billion (S$4.8 billion) over the next four years.

There is also the risk to consumer spending via the so-called wealth effect. With around two-thirds of Australian households owning their homes, rising property values have long anchored confidence to borrow and spend.

Jason Zhang, the 36-year-old owner of a kitchen renovation business in Sydney, said many clients were shelving new projects, making him worried that work will dry up in 2027.

“Unless interest rates come down, there won’t be much change,” he said. “Everyone is bracing themselves for a long haul.”

To be sure, the retreat in housing prices comes off an exceptionally high base. It was also partly by design.

The total value of Australia’s 11.5 million homes surged 87 per cent this decade to an unprecedented A$12.8 trillion.

The Reserve Bank of Australia (RBA) raised interest rates three times between February and May to tame inflation fuelled by the Iran war, reversing the policy easing in 2025 that had helped fuel record home prices.

“The housing market is a bit of litmus test” for whether financial conditions are tight enough to bring inflation back down, RBA governor Michele Bullock said on July 28. “If it looks like inflation is not coming down, then I think the board has some difficult decisions to make.”

At the same time, “we have seen the housing market slow more than we were expecting”, she said.

Loan demand plunge

A government overhaul of investor tax breaks has added to the pressure by curbing negative gearing – which allows investment property owners to deduct losses on the property from their taxable income – on established homes and scrapping a generous tax discount for investors.

Data from credit analytics firm Equifax showed mortgage inquiry levels dropped 14 per cent in June from a year earlier, marking a sharp reversal from January’s growth of nearly 11 per cent.

Younger buyers with limited savings, who are more sensitive to rising rates, are driving the pullback.

Research from property data provider Cotality showed higher borrowing costs mean properties have not become more affordable in Sydney and Melbourne despite the decline in housing prices.

“Even though the market drops and there are more accommodative government policies, a lot of first-home buyers are hesitant to commit to a long-term liability,” said Liza Cheong, a mortgage broker in Sydney.

“Investors who wanted to negative gear just withdrew from their plans,” she said. “The energy from clients is completely different from before.”

That is a threat to the biggest single cash cow for Australia’s banks as competition for borrowers hots up.

The overall index of bank shares has tumbled 12 per cent since February, wiping more than A$60 billion from their market value.

The slowdown is reaching retailers, too.

Shares in department store Myer plunged 10 per cent on July 27 after it warned of a consumer spending slump in June and July, citing “a weaker housing market” among the pressures on households.

New property listings are falling even as total housing stock climbs, a sign that homes are sitting unsold for longer.

Sydney unit sales fell to just 2,495 in June, the lowest in at least five years, barring the seasonal January lull, while open home attendance dropped to an average of 2.1 people in the four weeks to July 11, according to real estate agency Ray White.

With oil prices staying high, bets on US Federal Reserve policy easing in 2027 have all but evaporated, dimming hopes for a quick housing market turnaround.

“We will get used to the new trading conditions, and we’ll resume business as usual at some point,” said Sebastian Watkins, chief executive of Lendi Group, Australia’s largest retail mortgage broker.

“Is it six months? Is it 12 months? It’s really hard to say.” REUTERS