Australia's housing market downturn has smashed a 40-year record. Will home prices continue to fall?

Higher interest rates, household debt and the erosion of savings since the pandemic have been blamed for the steepest plunge in home values since at least 1980.

Sydney home values led the latest nosedive, falling 13 per cent from their highest point. Source: Getty / zetter

Key points

• Home values fell 8.4 per cent nationally between May 2022 and January 2023.
• It's the deepest peak-to-trough fall on CoreLogic's records, which go back to 1980.
• Higher interest rates and high levels of household debt are among the contributing factors.

The Reserve Bank of Australia's aggressive rate-hiking cycle has triggered the housing market's biggest decline in more than four decades.

The 8.4 per cent drop between May 2022 and January 2023 is the deepest peak-to-trough fall on CoreLogic's records, which go back to 1980.

It surpasses the previous record-breaking slide between 2017 and 2019, as well as the downturn prompted by the Global Financial Crisis in 2008.

Sydney home values led this latest nosedive, falling 13 per cent from their highest point.

Brisbane prices plummeted 10 per cent while Melbourne dwelling values tanked 8.6 per cent from peak to trough.

What's driving the drop in home values?

The Reserve Bank's combined 300 basis points in interest rate increases have shrunk the amount buyers can borrow and generally cooled their confidence.

High household indebtedness may have increased the housing market's sensitivity to interest rates, CoreLogic head of research Eliza Owen said.

"Higher inflationary pressures, combined with a post-lockdown surge in spending, has also eroded household savings, which could be utilised for a home loan deposit," she added.

The market may also be enduring a "hangover" from higher sales and activity in 2021 that's left a vacuum in demand.

Will home prices continue to fall?

The market is unlikely to have bottomed out, with further cash rate increases from 3.1 per cent likely to continue driving prices lower in 2023.

Markets are pricing-in a cash rate peak of about 4 per cent, while forecasts by economists average to a more subdued 3.6 per cent.

"Ongoing increases in interest rates will further erode the borrowing capacity, and likely prolong the country's housing downturn until interest rates stabilise," Ms Owen said.

Weakening property prices and high building costs continue to weigh on new building projects, with housing approvals falling 9 per cent in November.

Building approvals, the key indicator of future activity in the construction industry, have sunk by 21.7 per cent since August.

Australian Bureau of Statistics data released on Monday mark the third consecutive month of lower council approvals.

The November decline was led by the more-volatile private attached dwelling segment, which fell 22.7 per cent. Approvals for private sector houses dipped 2.5 per cent.

Total dwelling approvals fell in NSW, Western Australia, South Australia and Queensland but lifted in Tasmania and South Australia.

The value of non-residential building approvals remained robust, however, lifting 2 per cent in November.