House prices can fall safely, and must drop to fix affordability

It's rare to find anyone in the property sector willing to talk about falling prices, let alone labelling them a good thing.

But in a devastatingly honest assessment of Australia's housing market, Cotality's head of research Eliza Owen does just that.

Cotality, formerly known as CoreLogic, is one of the nation's leading providers of real estate data — including to agents, banks, mortgage brokers and valuers, as well as the media.

In a pre-election sense check, Owen has questioned the logic of the major parties, whose housing spokespeople Clare O'Neil and Michael Sukkar have both said they'd prefer house prices to keep rising, albeit preferably by less than incomes.

If incomes rise faster than house prices that will, by definition, make housing more affordable.

But, given current record levels of house prices relative to incomes in Australia, it would take decades to make homes genuinely affordable for the average income earner, as this analysis by Tarric Brooker illustrates.

Meanwhile, the "housing affordability" policies put forward by both Labor and the Coalition are both more likely to see prices rise faster than incomes, by allowing more first home buyers to purchase with smaller deposits (Labor) or allowing tax deductions for interest costs and access to superannuation for a deposit (Coalition).

As Owen concludes, if you want more affordable housing then falling prices, not more policies that will increase ability to pay and stoke demand, is the way to go.

"The alternative — runaway prices, deepening inequality, and falling ownership rates — could prove more damaging in the long run," she warns.

"Concessions and incentives for first home buyers might provide a sugar hit to home ownership numbers in the short term, but they do nothing for the long-term viability of home ownership as affordable and attainable."

Can Australia afford falling house prices?

But around two-thirds of bank assets are tied up in residential real estate, along with well over half of all household "wealth".

The construction and real estate sectors combined account for close to 11 per cent of Australia's economic activity, according to the Property Council using ABS data.

So can Australians afford to see property values go backwards?

Owen argues yes.

On an individual and financial stability level, she argues most property owners and their lenders are well insulated from price falls, given previous home value increases.

"In the December 2024 quarter, 95.7 per cent of residential resales achieved a nominal profit," according to CoreLogic's resale data.

"If resale values were reduced by 10 per cent, 88.5 per cent of vendors would still have recorded a gain, with the median profit sitting at $263,000."

How much difference would a 10 per cent decline make for prospective first home buyers?

"The median value to income ratio, which was 8 at the end of last year, would go down to 7.2, and a 20 per cent deposit on the median dwelling value in March 2025 would fall by about $16,000 (from $164,000 to $148,000)," Owen notes.

But a fall in home prices doesn't just make it easier for prospective first home buyers to clear the deposit hurdle.

A 10 per cent fall for the median priced home would lower the buyer's mortgage repayments by about $100 a week, and save them more than $130,000 over the life of their loan at current interest rates and with a 20 per cent deposit.

We've weathered previous housing downturns

We have seen recent examples of home price falls close to this scale.

As interest rates rose dramatically from COVID lows, capital city home prices fell 8.1 per cent over 2022-2023. Prior to that, tighter lending rules saw prices drop 8.2 per cent between 2017-2019.

Owen cites Western Australia's post mining boom property slump as a localised example, where prices fell 16.1 per cent between 2014-2019.

"By mid-2020, nearly 44 per cent of home resales in Perth were made at a nominal loss. Yet despite this prolonged downturn, mortgage arrears remained below 2 per cent, and the financial system remained stable," she observes.

"First home buyers benefited as the value to income ratio across Perth dwellings fell from 6.6 to 4.8 between June 2014 and June 2019.

An even bigger home price fall would obviously result in much larger savings for would-be buyers, but also come with increased risks for existing owners, the financial system and the economy.

However, as Owen points out, the Reserve Bank noted in its most recent Financial Stability review that only about 10 per cent of borrowers would slip into "negative equity" — that is, owing more to the lender than their property is worth — even if house prices fell 30 per cent.

That also fails to consider the more than 30 per cent of Australian households who are living mortgage-free and don't face the spectre of negative equity.

The cost of rising house prices

Even if most individual home owners wouldn't be wiped out and the banking system wouldn't collapse, Owen acknowledges the economic risks of large home value falls.

"Housing value performance is tied to consumption through wealth effects, property taxes are a huge source of state government revenue, and many Australians are employed across the construction, financing and transaction of real estate," she notes.

The same Property Council analysis cited earlier in this article estimates that the equivalent of 1.4 million full-time jobs were directly linked to the property sector in 2021-22, with a further 1.75 million jobs indirectly supported by the sector.

House price downturns tend to result in construction slumps, meaning some significant portion of those jobs would be at risk.

But relying on ever increasing house prices is not a recipe for economic success, as demonstrated throughout history and across the world — think Ireland, the US and Spain during the global financial crisis.

"A fall in values need not be viewed as a negative for the Australian economy," Owen argues.

"Housing is not only an investment, but also something people consume.

"Put another way, it wouldn't be the end of the world if prices were to moderate or even fall slightly."

Far from the end of the world, a moderate fall in home prices might just be the necessary starting point of a better economic future for Australia.