Double-digit property downturns in Australia would make little dent in the gains accumulated across mid-sized housing markets, according to new analysis from property data firm Cotality. The latest modelling examines how potential price drops of 5, 10, 15, and 20 percent would affect capital city dwelling values following a five-year housing boom.
Melbourne Buffer Tested by Potential 10 Percent Drop
Years of subdued growth have left Melbourne with a relatively thin safety margin if property prices fall further. Dwelling values in the city peaked at $840,000 in November 2025, according to Cotality data.
“A decline beyond 10 per cent in Melbourne would return values to pre-pandemic levels,” Cotality head of research Gerard Burg said.
In contrast, markets such as Perth, Brisbane, and Adelaide recorded exceptional growth over the past five years. This surge provides those capital cities with a more significant buffer against market corrections.
“Even if Perth’s housing market fell 20 per cent from its peak, the median dwelling value would still be around where it was in April 2025 after recording one of the strongest growth cycles of any capital city,” Mr Burg said.
ANZ Forecasts Deeper Declines Across Sydney and Melbourne
Property prices across Australia could plunge by 4.3 percent this year and a further 3.4 percent in 2027 as the current market downturn intensifies, according to separate modelling from ANZ. Economists Madeline Dunk and Adam Boyton attribute this downward trajectory to a projected 14.5 percent peak-to-trough decline in Sydney values and a 12.8 percent fall in Melbourne.
“Since our last forecast update in June, the housing market has softened a little more than we were expecting,” Ms Dunk and Mr Boyton said. They noted that Sydney and Melbourne prices have declined slightly more than anticipated, while Brisbane and Perth values have started falling earlier than forecast.
Restrictive interest rates, recent tax policy changes, and ongoing global uncertainty have combined to dampen overall market sentiment, according to the ANZ economists.
Debating the Likelihood of a 20 Percent Crash
A double-digit market collapse remains an unlikely scenario without severe economic disruption. PRD chief economist Diaswati Mardiasmo stated that a 20 percent market fall would require a GFC-type situation.
“A 20 percent fall seems a little far-fetched to me, it would be a massive swing in the pendulum,” Dr Mardiasmo told the ABC. She added that a 5 percent drop is more realistic given that inflation has trended downward each month since March.
Dr Mardiasmo views current market softness as temporary, driven primarily by high interest rates and government property tax adjustments. If inflation continues on its downward path toward a level the RBA is comfortable with (around 3.4 to 3.5 percent), she expects a market turnaround by mid-to-late 2027.
ANZ echoes expectations of a medium-term recovery, forecasting price growth to resume over 2028. “Given the broader supply backdrop, and the capacity constraints in the construction sector, we think it is hard to see housing prices falling for an extended period,” Ms Dunk and Mr Boyton said.
RBA Focuses on Inflation Risks Over Housing Cycles
Reserve Bank of Australia Governor Michele Bullock confirmed that the board is monitoring the flow-on effects of the housing market downturn. However, she emphasized that residential property prices are not the primary focus for future cash rate decisions.
“The main game here for us is excess capacity, tight labour market, particularly in some areas like construction, the Middle East conflict, the AI boom — these are all the things that are front of mind in terms of risks to the inflation outlook,” Ms Bullock said.
RBA staff economic forecasts indicate that house prices will continue “to decline gradually for a period.” Meanwhile, financial markets price in a 60 percent probability that the central bank will implement another 0.25 percentage point rate rise by the end of the year, which would bring the cash rate to 4.6 percent.
Did you know?
Perth, Brisbane and Adelaide recorded exceptional growth among Australian capital cities over the past five years, creating buffers that protect against market pullbacks.
Frequently Asked Questions
Could Melbourne house prices fall back to pre-pandemic levels?
Yes. Cotality analysis indicates that a price decline exceeding 10 percent in Melbourne would return dwelling values to pre-pandemic levels due to its relatively thin growth buffer.
What are major banks forecasting for Australian house prices?
ANZ economists forecast property prices to fall by 4.3 percent this year and 3.4 percent in 2027, driven by peak-to-trough drops in Sydney and Melbourne, before staging a recovery over 2028.
Is the RBA raising interest rates because of house prices?
No. RBA Governor Michele Bullock stated that housing values are not the central bank’s main focus. Instead, monetary policy decisions are driven by inflation risks, labor market capacity in sectors like construction, and global economic factors.
Join the Conversation
How are you seeing local property values respond to current interest rate pressures in your area? Share your thoughts in the comments below, or subscribe to our newsletter for weekly updates on the Australian housing market.