Australian house prices: AMP now tipping record 15 per cent market plunge which would be worst on record

Australian home prices could plunge by 15 per cent as the prospect of a fifth interest rate hike this year exacerbates potentially the worst downturn on record — conservatively wiping $140,000 off property values across the country.

Such a catastrophe for homeowners would be significantly worse than the downturns of the early 1980s during a year-long recession and a pre-COVID slump following a crackdown on interest-only loans.

Under this scenario, national home values would plunge by $139,971 but in Sydney, house prices would plummet by $241,057, leaving recent borrowers battling mortgage stress with the disaster of severe negative equity where they owed their bank more than their home was worth.

Despite that dire prediction from AMP, Anthony Albanese was unrepentant and defended Labor’s Budget tax changes that weren’t taken to last year’s election.

“We want young Australians to own their own home,” the Prime Minister said on Thursday.

“To have the same opportunity that previous generations have had. That’s why we put in place the changes.”

The prospect of Australia’s worst-ever downturn has also seen the Reserve Bank model the possibility of home prices diving by 20 per cent, and what that would mean for distressed borrowers who couldn’t repay their mortgage in the extreme case of the RBA hiking the cash rate four more times to a level last seen in 2008.

Mr Albanese was adamant Labor’s policy of quarantining negative gearing for brand new investment properties would boost housing supply, despite annual new home completions running well behind the National Housing Accord target of 240,000 new dwellings a year.

“Now, that doesn’t happen within a month or two months or three months of the new financial year, but that will happen over a period of time,” he said.

“And that will lead to an increase in supply, and we know that supply is absolutely critical.”

Sydney’s median house and unit value have now plunged by 8.6 per cent to $1.2 million since peaking in February, when the Reserve Bank began the first of four rate hikes this year, new Cotality data for September showed.

But the contagion is spreading to other markets with prices in Perth falling by 6 per cent to $975,022 since an April peak, despite still being Australia’s strongest market during the past year.

Brisbane prices are down 5.4 per cent to $1.049m since peaking in May, when Labor’s Budget scrapped negative gearing for established properties from next year and ended generous capital gains tax concessions.

Adelaide prices since that time have dipped by 2.9 per cent to $928,560.

Melbourne, Australia’s weakest property market, is 7.5 per cent weaker than its March 2022 peak reached before a previous Reserve Bank hiking cycle, making $780,550 the mid-point price.

National property prices have dropped by 5.2 per cent since March to $899,236 but in the capital cities, where prices are generally higher, they have plummeted by 6.4 per cent since that peak to $973,525.

Treasurer Jim Chalmers said values were back to late 2025 levels, arguing rate hikes are playing a bigger role than Labor’s Budget changes.

“Prices started to come off before the Budget and that’s because there are a number of factors at play,” he said.

But shadow treasurer Tim Wilson said first-homebuyers who got into the market under the Federal Government’s 5 per cent deposit scheme were at risk, after the Reserve Bank’s Financial Stability Review noted those who bought on a low-deposit mortgage were more at risk of negative equity.

“To cover for their failing economy, the Albanese government lured aspirational first homebuyers at the greatest time of risk, and now they’re paying higher interest on empty debt,” he said.

“The Albanese government’s addiction to spending is stoking inflation, increasing interest rates, collapsing home values and sending families backwards.”

The Reserve Bank’s decision on Tuesday to raise rates to a 15-year high of 4.6 per cent will only further weigh down the housing market, Cotality’s research director Tim Lawless said.

“With household debt at high levels, borrowers are far more sensitive to interest rates compared with 15 years ago when interest rates were previously this high,” he said.

“Borrowers are not only facing higher mortgage costs, but also an extended period of elevated living expenses and negative real income growth.

“Together, these pressures are narrowing the pool of buyers able to qualify for a mortgage and reducing the amount they can afford to pay.”

AMP chief economist and head of investment strategy Shane Oliver is forecasting a 10 to 15 per cent drop in Australian home values by late 2027, as a result of the Reserve Bank’s four interest rate rises so far this year and Labor’s Budget tax changes.

“The Australian housing market is still likely to weaken significantly further as higher mortgage rates, the removal of most property tax concessions, record poor affordability and poor confidence continue to impact at a time of a rising risk of distressed selling,” he said.

“Rate hikes are usually associated with falling property prices or slower price growth. This is because they cut how much buyers can borrow, can boost distressed sales and hit home buyer confidence.

“The drip feed of higher rates will also put more pressure on existing homeowners already suffering from mortgage stress which when combined with rising levels of unemployment risks a rise in distressed home sales and defaults.”

A 15 per cent peak-to-trough decline in Australian house and unit prices would be worse than the 7.7 per cent decline in 1982 and 1983 during a drought and a year-long recession and an 8.2 per cent decline from 2017 to 2019 after the banking regulator cracked down on interest-only loans.

Such a plunge would see national home prices plunge from a March peak of $933,137 to $793,166 — wiping off $139,971.

In Sydney, Australia’s most expensive capital city market, house prices would plunge from $1.607m when they peaked in February to $1.366m - marking a decline of $241,057.

The Reserve Bank’s latest Financial Stability Review for October modelled the prospect of a 20 per cent plunge in home prices.

“Additionally, even if housing prices decline by a further 20 per cent, few households are in negative equity in this scenario,” it said on Thursday.

“Being in positive equity gives borrowers the option to make a decision — though difficult and disruptive — to sell their property to fully pay off their loan if they experience acute financial stress, rather than falling behind on their payments.”

The RBA also estimated 5 per cent of borrowers would be at risk of defaulting on their mortgage should the RBA cash rate climb to 5.6 per cent for the first time since 2008 — implying four more rate hikes — as inflation rose from 4 per cent to 7 per cent and unemployment soared from an existing five-year high of 4.6 per cent to a COVID level of 6.3 per cent.

“In this scenario, around two-thirds of these borrowers are estimated to have insufficient income to cover their expenses but have enough buffers to service their debts and essential expenses for at least six months,” it said.

Another four hikes, on top of Tuesday’s increase, would impose another $495 to monthly repayments on an average new mortgage of $731,000, adding up to $5940 over a year.

The four increases since February are already adding $475 to monthly repayments, with borrowers already set to be paying $5700 more than they did in annual servicing costs when the banks pass on the latest increase next week.

Westpac and ANZ are predicting a fifth hike for 2026 on November 3 which would take the RBA cash rate to an 18-year high of 4.85 per cent Melbourne Cup Day.