Can Australia make housing affordable while avoiding a major market crash? We may soon find out

Less generous tax settings for property investors has made betting on rising home prices less attractive. Where this will settle is impossible to predict. Photograph: Diego Fedele/AAP

The Reserve Bank has hiked interest rates and the property market is in retreat. So far, so normal.

Or is it?

There is a sense that this year’s fall in home prices feels different from previous episodes. The data tells another story.

Over the past four decades there have been seven property market downturns of varying length and depth, according to analysis put together by Shane Oliver, AMP’s chief economist.

They are often triggered by interest rate hikes, which make home loans more expensive, but they also occur during crises and policy changes.

For instance, there was a short-lived fall from April 2020 during the Covid-19 pandemic lockdowns, when the average capital city home value fell by 1.5% over three months.

Two years later, and at the tail end of a massive boom, there was a much steeper decline after the RBA started its rearguard battle against roaring inflation.

Between April 2022 and January 2023, prices dropped by 8.1%.

The largest downturn in property prices in recent memory started in September 2017, when average capital city home values declined by 8.2% – albeit over a much longer 19 months. That time it was a regulatory crackdown on investor lending in an attempt to squash some of the speculative fervour that had gripped the market.

Which brings us to today.

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Oliver forecasts that average prices across the capital cities will keep falling until about April next year, capping a 7.8% drop from top to bottom.

That would certainly make it among the steepest falls in the past four decades – UBS says the average since the early 1990s has been a 5% decline over 13 months.

Oliver says this year’s home price declines started with the three straight interest rate hikes but are now more about the shift in sentiment triggered by the government’s changes to property investor taxes – a psychological twist that makes it harder to predict how things will turn out from here.

“So far it looks similar to past cyclical downturns, but I think it’s early days yet,” he says.

It’s also worth noting that the downturn looks very different depending on where you are in the country, as analysis from NAB shows.

For example, the bank’s economists predict the peak-to-trough declines in Sydney and Melbourne will be in the order of 10%, versus 2% to 4% falls across the mid-sized capitals. And looking at performance by calendar year – instead of just the periods where prices are falling – values in Brisbane, Perth, Adelaide and Hobart are predicted to be higher in 2026.

They expect prices to level out in early 2027 before beginning to grow “modestly” through the second half of next year thanks to lower interest rates and improving sentiment.

“Ultimately, we see house prices continuing to be well supported by the imbalance of supply and demand,” they note.

Still, change is in the air. Less generous tax settings for property investors has changed the maths and made betting on rising home prices less attractive. Where this will settle is impossible to predict.

Interest rates are expected to be structurally higher than they were before the pandemic. That means mainstream politicians’ fever dreams of “sustainable price increases” – where values keep rising but by less than wages – may happen.

NAB forecasts pretty stagnant property price growth next year. Will that be the new normal? And if it is, surely that is a step in the right direction on the long, long road to achieving a more affordable property market without a major crash?

In the meantime, expect the government to cop plenty of flak for “attacking aspiration” or “deliberately crashing Australians’ wealth”. But as Oliver says, despite all the angst and outrage, politicians of all stripes profess to want more affordable homes.

Slashing immigration, turbocharging building or hiking taxes – or some combination of these – all lead to a situation where house prices would come off and be more stagnant over time.

That may well be where we are heading now. It’s hardly a solution to our housing mess but it’s a start.

• Patrick Commins is Guardian Australia’s economics editor