Housing market set to soften before stabilising as rates and policy weigh on sentiment

Sentiment drives near-term slowdown

Australia’s housing market is losing momentum, as a combination of higher interest rates, weaker sentiment and policy changes dampen buyer and investor activity. 

“Over the past couple of months, we have clearly seen momentum in the housing market slow down,” CommBank Senior Economist Trent Saunders said on the latest CommBank View: Economics and Markets podcast. 

“Price growth has slowed, auction clearance rates have declined and homes are taking longer to sell,” he added. 

While fundamentals including supply, demand and interest rates shape long-term house price trends, Saunders said sentiment is playing an outsized role in the current environment. 

“In the short term, sentiment can be a key driver of housing market activity,” he said. “When there’s uncertainty, buyers and investors often step back, and that can reinforce weaker conditions.” 

Policy changes add pressure

Recent Federal Budget changes to negative gearing and capital gains tax have helped put the brakes on the market, Saunders said. 

“We’ve seen those three rate hikes from the RBA… and then additional pressure from the budget changes,” Saunders said. “It’s adding to the pressure that was already there.”

The reforms are aimed at encouraging investment in new housing and improving affordability over time. However, Saunders said that constrained supply of new housing remained a significant obstacle to a more affordable market developing over time.

“Until you address those supply issues, we don’t see it making a meaningful dent,” he said, pointing to high construction costs, regulatory complexity and infrastructure bottlenecks as key barriers.

Prices to soften in key markets

Commonwealth Bank Economists have revised their outlook for housing prices lower, with a sharper slowdown now expected.

“We now expect house prices to be flat over the course of this year,” Saunders said.

In the nation’s two largest cities, Sydney and Melbourne, prices are expected to decline in over the near term, as softer sentiment and weaker investor demand percolate through the market. By contrast, in Brisbane and Perth, where supply and demand are more tightly balanced, CBA’s economists expect to see less of a pull back.

With prices either slowing or falling in many markets, there has been some suggestion that homebuyers who bought in the lead up to the budget may be caught in a negative equity situation, where the property’s market price falls below the amount they borrowed to finance it.

“It’s a possibility that some first home buyers could be tipped into negative equity, depending on their circumstances,” he said. “But we don’t expect this to be a widespread issue.”

Recovery expected as rates ease

Looking ahead, an expected easing in the Reserve Bank of Australia’s monetary policy stance next year could stem property price declines. CBA economists expect the RBA to cut the cash rate twice next year, Saunders said.

“We have a rate cut pencilled in for May and a rate cut pencilled in for August,” he said, noting this would ease borrowing constraints and support demand. 

He said the housing cycle is likely to reach a turning point in early 2027, as expectations of lower rates begin to improve confidence.

“As more attention shifts towards the possibility of rate cuts, that’s when we see market conditions starting to stabilise,” he said. 

Despite near-term softness, Saunders said the longer-term outlook remains supported by underlying demand, with property prices expected to resume growing once the market shakes off some of the short-term challenges around weaker sentiment.

Read Trent Saunders full research note here