How could a drop in home values impact Australia’s property market?

In a recent pulse report from Cotality, head of research, Eliza Owen, analysed whether the pledged policies could favour property buyers and potentially have long-term consequences for Australia’s housing market and broader economy.

Pledges such as Labour’s 5 per cent deposit for first home buyers and the Coalition’s promise of new tax deductions for owner-occupiers of newly built homes have previously raised concerns from industry experts that they could exacerbate the housing affordability crisis.

“Without corresponding efforts to increase supply, such measures risk placing further upward pressure on already elevated home values, the very dynamic driving the need for intervention in the first place,” Owen said.

Although Owen noted that the major parties’ housing policies could shift conditions in favour of buyers, she said that a potential drop in housing values would not undermine the financial stability of Australia’s property market.

She argued that a decline in property values wouldn’t be necessarily negative, warning that unchecked price growth and worsening housing inequality could pose greater long-term risks to the Australian economy.

While national housing values for the Australian market have increased measurably over the past five years, she said it isn’t the only way for owners to capitalise on their property.

“For many existing home owners, values do not need to continually rise to deliver strong capital gains.”

Recent Cotality data showed that most home owners would remain in a “strong equity position” if national home values fell by as much as 10 per cent.

“In the December 2024 quarter, 95.7 per cent of residential resales achieved a nominal profit,” she said.

“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.”

While a recent Cotality report showed that housing unaffordability indicators across Australia remained at or hit new records at the end of 2024, Owen said that a fall in national home values could help buyers to step onto the property ladder.

“A 10 per cent fall in national home values would rewind the market back to May 2023 levels,” Owen said.

“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).”

Although falling property values have raised concerns about negative equity, Owen pointed to recent data from the Reserve Bank of Australia (RBA) suggesting that these risks may be overstated.

“The RBA estimates less than 1 per cent of mortgaged households are in negative equity, and this is in part due to high home values,” Owen said.

“But, as noted in their latest financial stability review, even when faced with a severe 30 per cent decline in housing prices, around nine in 10 mortgagors would still have positive equity,” she added.

Even for newer buyers without a mortgage buffer, the Australian Prudential Regulation Authority’s (APRA) findings indicated that a dip in property values is unlikely to push them into negative equity.

“APRA data shows around 70 per cent of home loans were originated with a deposit of at least 20 per cent, meaning the value of a home would need to fall more than 20 per cent from the purchase value before the buyer was in negative equity,” Owen said.

Owen noted that while the financial position of most mortgaged households has remained stable due to the traditional strong buffers, certain parties’ pledges could compromise this security.

“Some of the policy proposals floated ahead of the election, such as expanding low home loan deposit schemes or reducing the serviceability assessment buffer, may pose more risk to financial stability unless housing values do in fact continue to rise,” she said.

Alongside these potential risks, Owen highlighted that households are likely to be sensitive to a potential weakening in housing values, with RBA data suggesting that residential housing and land currently account for 55 per cent of household wealth.

Owen also noted that buyers and investors who have recently purchased property during periods of strong growth will be more exposed to the adverse effects of price falls.

“About 20 per cent of residential properties changed hands in the past five years, and roughly 2.6 million home loans have been written in this period with around one in four going to first home buyers,” Owen explained.

Nevertheless, Owen said that a fall in values should not be viewed as a negative for the Australian economy.

She raised that the potential effects of an increasingly unaffordable and impenetrable housing market could be proportionally worse.

“The alternative – runaway prices, deepening equality, and falling ownership rates – could prove more damaging in the long run,” she said.

Owen stressed the need for broader housing reform that will open the door to home ownership for Australians and emphasised that “we can’t keep kicking the can down the road on housing affordability”.

“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,” she concluded.