The housing market is showing the first clear signs of the changes announced in the May Budget, according to Nerida Conisbee, Ray White Group’s chief economist.
Established home prices are falling, particularly in the more affordable parts of the market that had previously been propped up by strong investor demand. At the same time, rents are still rising and the pipeline of new housing remains weak.
Across the combined capital cities, dwelling values fell 4.3 per cent over the September quarter, Nerida said. Rents, by contrast, are still 5.5 per cent higher than a year ago.
“The clear divergence between the two really emerged around the time of the May Budget, with home values turning down while rents continued to rise,” she said.
Investor activity has also weakened since the Budget, Nerida said, putting downward pressure on more affordable established properties while reducing the amount of rental housing being added at a time when rental supply was already tight.
“Lower house prices therefore do not necessarily mean housing conditions are becoming easier,” she said.
New housing is the next problem. The cost of a new dwelling has risen by around 48 per cent since the end of 2019, and new dwelling prices were still 5.4 per cent higher over the year to August, even as established values turn down.
Nerida said that gap is becoming increasingly difficult for developers, with labour, construction and finance costs all remaining high.
“If the price of an established home falls while the cost of building a new one continues to rise, fewer projects will make financial sense,” she said.
This is unfolding while Australia is already struggling to build enough homes. Trend dwelling approvals came in at 18,202 in August, below the average pace of 20,000 a month required to deliver 1.2 million homes over five years.
Approvals have recovered from their 2024 lows but remain short of what is needed, and Nerida noted that approvals overstate what will eventually be delivered, with some projects delayed and others never commencing.
Nerida described a feedback loop in which higher interest rates push established prices lower, the Budget further weakens rental supply, and falling established prices make new development harder to justify.
“If fewer projects proceed, fewer homes are built and the housing shortage becomes worse,” she said.
“A housing shortage does not stop prices falling when borrowing capacity is being hit by higher rates. We are seeing that now. But it does make a prolonged downturn harder to sustain if fewer homes are being added at the same time.”
“The risk is that today’s price falls make tomorrow’s housing shortage worse,” Nerida said. “If weaker established prices discourage new development while investor demand continues to retreat, Australia ends up with fewer rentals and fewer new homes. Once interest rates stabilise and demand recovers, the supply problem will still be there, only larger.”