Australian house prices set to drop 9 per cent, Commonwealth Bank forecasts

Australia is approving enough houses to keep up with its supply needs, but more work needs to be done in order to hit an ambitious housing target.

New figures released by the Australian Bureau of Statistics (ABS) show dwelling approvals slipped 3.6 per cent in July to 17,687.

Despite the slip, nationally there are more than 210,000 homes approved over the last 12 months.

While Australia is still behind the 240,000 homes a year needed as part of the housing accord, AMP economist My Bui says Australia has finally stopped falling behind in the number of houses it needs.

“However, recent strength in approvals is a good sign for housing supply in Australia as we need to be building roughly 190k units per year to house population growth,” she said.

Ms Bui concedes while approvals are up, Australia still has the challenges of actually completing these properties.

Australia is currently on track to build around 175,000 new homes in 2026.

As part of Labor’s response to rising housing costs, the government announced a National Housing Accord – a banding together of all levels of governments to build 1.2 million new homes over five years until June 2029.

Ms Bui says going forward housing approvals are likely to be impacted by higher costs and rising interest rates.

“New dwelling approvals also tend to negatively correlate with building cost inflation as projects become less attractive with higher input costs, while the overall property market is softening,” Ms Bui said.

“So far, the ABS has noted that builders are still passing on higher fuel and material costs to consumers, but high inflation remains a key risk to construction approval and completions through to year end.”

Why did housing approvals fall in July

Following a long stretch that has been largely positive dating back to 2025, housing approval fell largely due to detached housing.

According to the ABS, detached houses fell 4.2 per cent in July, while apartments slid just 0.4 per cent.

”While private sector houses were down 4.2 per cent, this came off June which had the most approved since September 2021. In year-on-year terms, the result is 6.0 per cent higher than July 2025,” ABS head of construction statistics Daniel Rossi said.

South Australia had the largest drop in private sector house approvals, down 10.7 per cent, following a strong result in June.

Housing market downturn deepens

As Australia finally catches up with the number of houses needed to keep up with migration, Commonwealth Bank economists warn house prices are set to drop.

In his latest forecast Commonwealth Bank senior economist Trent Saunders warns national dwell prices will drop around 9 per cent in this cycle, while the capital cities will go into a correction.

A correction is a fall of more than 10 per cent peak to trough.

“The largest declines remain in Sydney and Melbourne, where underlying demand‑supply conditions have been less supportive than in the mid‑sized capitals” he said.

“We now expect Sydney dwelling prices to fall by 11 per cent over 2026, taking the peak‑to‑trough decline to around 13 per cent.

“Melbourne prices are also forecast to fall by 10 per cent over the year and around 12 per cent peak to trough.”

If Commonwealth Bank’s forecast is correct, it would mark one of the quickest and deepest downturns in the Sydney housing market in at least the past two decades.

Mr Saunders said a fourth interest rate hike in November – taking the cash rate from 3.60 to 4.60 per cent over the last 12 months, will only add to the decline in house prices.

“We still expect the downturn to eventually run its course,” he said.

“Falling prices should improve affordability and increase the rental yield, drawing some buyers back into the market.”

“The expected easing in monetary policy during 2027 should also provide some support. And housing supply is still very tight, with the vacancy rate a historically low level of 1.8 per cent in August.”