Warren Hogan explains why falling house prices, changing buyer behaviour and the broader economy could reshape the market well into 2027 — Founder, Managing Director and Principal Forecaster at EQ Economics
Article from FBAA
Australia’s economic outlook hinges on the residential property market as rate hikes and tax changes threaten to push down house prices and squash housing turnover well into 2027. If the housing market woes intensify over the rest of 2026 the economy may weaken further as we head into 2027.
This somewhat pessimistic view could underestimate the resilience of consumers and the broader economy as investment activity in technology and continued employment growth drive a renewed push out of economic activity in late 2026 and into 2027.
We know the construction spending pipeline is strong and government spending shows no sign of easing over the year ahead. Recent economic weakness could easily make way for a healthier recovery later this year. And with a pickup in housing markets we’d need.
The outlook for interest rates is heavily dependent on the path the economy takes. With inflation rising, the risks to the cash rate remain skewed to the upside over the next 6 months. Longer term we need to get used to the idea that a 4% cash rate is normal, rather than ‘high’.
The housing market is ground zero for Australia’s economic soft patch in 2026. The economy has been hit on all sides by resurgent inflation, interest rate hikes, a global energy shock and an unexpected tax hit to housing investors.
So far, the main casualty of these ‘shocks’ to our economy has been confidence and sentiment. Every major measure of consumer confidence has taken a big hit this year with consumer sentiment back to recession levels in June.
Business confidence took a major hit immediately after the start of the war in Iran, and although the latest readings are weak, there has been something of a recovery since the April low point. Thankfully, business activity has not collapsed in a similar manner, although it has moderated noticeably since March.
Housing markets are heavily impacted by general economic sentiment. The sudden shift in the direction of interest rates at the start of this year was always going to be a major headwind for the market. But it was the war in Iran that really damaged market confidence with many potential buyers and sellers pulling back until the fallout would be clear.
Two more rate hikes from the RBA and the announcement of major tax changes in May have kept sentiment participants on the sidelines. As the pipeline of people that must sell properties builds, prices are sure to fall further over the winter months.
The Spring selling season will be critical. A fall in overall house prices of about 5% in 2026 is pretty much locked in given how the fall in turnover we have already seen. The big issue is when housing markets recover. This will be critical for the trajectory of our economy as we move into 2027.
We can only hope for something of a recovery later this year. The alternative scenario, where the weak market scenario continues well into 2027 as new investor demands escape into the secondary market.
Investors have made up about 40% housing demand over the past 18 months. Anecdotal reports suggest that investor activity has stepped down by 20% since the Budget in May, effectively taking 8% of demand out of the market.
The stated objective of the government’s tax changes is to give the owner-occupier share of home ownership up at the expense of investors, presumably paving the way for a wave of new first home buyers.
First home buyers make up about 32% of the market over the last 20 years but the share gyrates over time, largely inverse to the investor share of the market. First home buyers can drop away and only make up 20% of the market at certain points in time. They can also pick up their share above 40%.
In 2008 and 2021 Australia experienced a massive 65% jump in first home buyer activity. In both of those periods first home buyers increased their share of new mortgages from below 30% to a high point of nearly 50%.
What motivated first home buyer affordability is the answer. In both 2008 and 2021 housing affordability improved by 10 percentage points over the prior year for first home buyer episodes to occur.
Affordability is essentially a measure of house prices versus household incomes. A rise in investor activity tends to explain rising rates while first home buyers tends to become more active when prices are moderate or fall, or when governments provide support to this segment.
It is looking highly likely that Australia’s house prices will fall by about 5% in 2026. If household incomes, or more specifically the incomes of first home buyers rise by about 5%, this will broadly equate to a 10% improvement in affordability.
This is a simplification of course, but it does look like we are on track for a large shift in the make up of home buyers in Australia. The question for the market is when this commences, and how far do house prices have to fall in the meantime to attract first home buyers?
The answer to this most likely lies with the state of the economy. The stronger the economy, the more employment grows and the lower interest rates, the more likely we see a rapid response from first home buyers.
Those worried that the government’s 5% deposit scheme that commenced last October has already tapped out the potential first home buyer market for 2026 shouldn’t be too concerned.
The scheme has only resulted in a 6% rise in the number of mortgages taken down by first home buyers over the six months to March 2026 when compared to the previous six months. First home buyers are a higher-than-average share of the market at 36% of new mortgages, but this could rise further.
Supporting the shift towards first home buyers in the mortgage market is the big lift in house purchases without mortgages in the last decade, presumably by older Australians moving house or downsizing.
Also important to note is the first home buyer surge in 2008 or 2021. If these episodes are anything to go by, first home buyers could take down almost half the mortgages at some stage in the next two years.
It looks like the government’s tax changes are going to get the desired result. The extent to which house prices need to fall to achieve this remains an open question but it looks like we are well on our way to getting the improvement in affordability that has driven a big lift in first home buyer activity in the past
PS – How does this affect you? L:ets chat and we can work out your borrowing capacity and options.
