For three decades, the one trade every Australian knew by heart was “buy property in Sydney.” Now it’s disintegrating.
That’s the gist of a Bloomberg feature from this summer, titled “One of the World’s Longest Housing Booms Is Cracking in Sydney,” which at the time read like a slightly alarmist look at a market that was “only” 3.6% off its peak. Two months, one rate hike and a whole lot of downward revisions later, it reads more like the opening chapter. According to the October Cotality data released just hours ago, capital-city prices fell another 1.4% last month and are now 8.1% below their March peak, with Sydney down 9.4% from a year ago. That’s already most of the way to Goldman’s latest peak-to-trough forecast of -12% (cut for the second time in two months), which would be a historically large drop for a country where housing is, well, basically the economy.
And the Reserve Bank of Australia is about to make it worse: on Tuesday the RBA is widely expected to hike for the fifth time this year, to 4.85%, the highest cash rate since the GFC. As Goldman’s rates desk put it after last week’s parliamentary testimony, the RBA made a “clear effort to downplay any dovish pushbacks (no concerns on financial stability, housing, household leverage, growth).”
In other words, the central bank has looked at the housing slump and decided it’s somebody else’s problem.
“The Surest Bet In Australia”
Start with the scale of the bet. “For the past three decades, buying a home in Sydney has been the surest bet in Australia,” Bloomberg’s Nasteho Said, James Mayger and Richard Henderson wrote on August 31. “Rising prices have enriched families and made property the engine of household wealth.” That wealth engine is enormous: about 60% of Australian household wealth is tied up in property according to Commerzbank, and the average Sydney home costs almost 14 times annual disposable income, making it the second-most expensive city in the world to buy property after Hong Kong (per Demographia). Nationally, prices jumped about 67% in the past decade, while home values more than doubled in Brisbane, Adelaide and Perth.
Regular readers know how Australians got here. As we noted in August in “Wealth Exodus: Australians Flock To Property Investment Over Business“, a CEDA report aptly titled “Bricks, not Businesses” found that the share of wealth the richest 20% of households hold in businesses collapsed from 11% to 4.4% over two decades, while their investment-property share rose from 10.2% to 14.2%. And the borrowing kept accelerating right up to the top: here is what we tweeted in February, about a month before prices peaked.
Nearly double the consensus. Nothing says “healthy market” like quarterly mortgage growth running at twice what the economists thought possible.
Then three things hit at once. First, the RBA started hiking in February (more on that below). Second, the Hormuz energy shock sent Australian fuel prices to records (recall that back in March, hundreds of Australian gas stations literally ran dry), which pushed inflation higher and made the RBA even more hawkish. And third, Treasurer Jim Chalmers took aim at the investor bid itself in the May 12 budget: existing properties bought after May 12 no longer qualify for negative gearing, the tax break that lets landlords deduct rental losses from their personal income. As Domain’s Nicola Powell told Bloomberg, “first-time buyers are not large enough to replace investors… We are really yet to see the true impact of fewer investors in the housing market.”
The fallout spread quickly to the banks (mortgage applications fell as much as 20% after the budget, per Bloomberg) and to developers: in late August, Sydney developer Bathla Group fell into insolvency owing A$3.3 billion after borrowing heavily from private credit funds. Long-time readers may experience déjà vu: we covered a near-identical episode back in 2019 in “Australia Housing Slump Prompts Collapse Of One Of The Nation’s Largest Developers.” The difference this time is that the lender of last resort for overlevered builders is private credit, and we all know how relaxed private credit has been about marks this year.
Then It Got Worse. Much Worse
When Bloomberg published, Cotality’s national index had just dropped 0.9% in August, for a cumulative decline of 3.6% from the March peak. The data since then has been ugly, and the data revisions even uglier.
A month ago, Goldman’s Australia economics team (Andrew Boak and co.) reported that capital-city dwelling prices fell 1.2% in September after a downwardly revised 1.5% drop in August (originally reported as -1.1%), while July had also been revised from -0.9% to -1.5%. You can probably guess what happened next. In its note out this morning in Sydney, titled “Australia: Cotality House Prices: Large price declines continue“, Goldman writes:
“Australian capital-city dwelling prices fell 1.4%mom in October, following a downwardly revised 1.5%mom fall in September (originally reported: -1.2%mom). Prices are now 8.1% below their March 2026 peak, to be around May 2025 levels. Prices declined most across the previously more resilient mid-sized capital cities, with the largest declines in Brisbane and Perth.”
That’s four straight months of drops of 1.4% or more, and every one of the previous three got revised lower after the fact. Annual growth in capital-city prices has swung from +7.7% in May to -4.8% y/y in October. Here is the bank’s chart of each monthly vintage, which says all you need to know about how reliable the “first print” has been:
The downturn has also gone from a luxury problem to everyone’s problem. Back in early September, Goldman noted that 93% of capital-city suburbs had recorded a decline over the prior three months, up from 46% over March-May, quoting Cotality: “what started as a more concentrated easing across higher-value segments has now become a much more generalised softening.” In October the previously bulletproof mid-sized capitals got hit hardest again: Brisbane fell 2.0% m/m (its fourth straight drop of 1.8% or more) and Perth 1.7%, with both cities’ once-spectacular annual gains (18.2% and 24.4% in May) now almost gone, at +0.4% and +3.9% y/y. Sydney fell another 1.6% and is now down 9.4% y/y, Melbourne is down 7.6% y/y, and only Darwin (+0.6%) and Hobart (+0.5%) managed to rise.
Seven months of declines have taken capital-city prices back to around May 2025 levels. In other words, the 2026 boom has been fully erased, and prices are now closer to the next line on Goldman’s chart (a 10% fall takes prices back to mid-2024) than to the peak. At this pace, maybe two more prints get them there.
Volumes are, if anything, worse than prices. Cotality’s latest chart pack showed an estimated 39,747 homes sold nationally in September, down 20.9% from a year earlier, with selling times blowing out to more than five weeks. In mid-October, just 1,423 homes went to auction across the combined capitals in a week, 45.8% fewer than the same week a year ago. And sellers are now paying up to get out: per today’s Cotality release, “median time on market, at 39 days, is the highest since August 2020, while vendor discounting, at 4.7%, is the largest since May 2019.” Even the one part of the market that was supposed to stay tight is cracking: the rental vacancy rate rose to 2.3%, close to its decade average of 2.4% (it was a record low 1.5% in February), while rents rose just 0.9% over three months, the smallest gain since January 2025.
Cotality also offered what may be the single most important sentence for anyone trying to figure out how deep this goes:
“With household debt at high levels, borrowers are far more sensitive to interest rates compared with almost fifteen years ago when interest rates were previously this high.“
Hiking Into The Slump
Which brings us to the RBA. After cutting three times in 2025 to 3.60%, the central bank reversed course in February and hasn’t stopped: hikes on Feb 3, Mar 17, May 5 and Sep 29 took the cash rate to 4.60%, fully undoing 2025’s easing and then some. Tuesday’s widely expected move to 4.85% would push the rate above the 4.75% peak of 2010-11 and to the highest level since the financial crisis.
The bond market noticed early. On the same day that Bloomberg’s housing feature dropped, Australian 10Y yields hit a 15-year high.
The problem for the RBA is that inflation, which the IMF warned back in April would be among the highest in the developed world, keeps proving it right. Last week’s Q3 CPI showed trimmed mean inflation of 1.00% q/q (3.66% y/y), “materially above” the RBA’s August forecast of 0.83%, while monthly headline CPI hit 4.3% y/y, driven by a 9.4% m/m jump in fuel prices. As Goldman noted, the print “reinforces our expectation of a 25bp RBA rate rise to 4.85% at next Tuesday’s November meeting” (available to pro subs, see “Australia: CPI: Underlying inflation increases +1.0%qoq“).
And the RBA has made no secret of where its priorities lie. In September, Deputy Governor Andrew Hauser told ABC that “people are furious about inflation… and what they want us to do is our job and bring inflation down.” On housing he was remarkably relaxed: prices had fallen “a bit,” but “house prices are still 3% higher than they were a year ago, and nearly 50% higher than they were at the beginning of this decade,” and “a supply crisis” creates a “floor to house prices.” (Capital-city prices are now 4.8% lower than a year ago, so that particular argument has already expired.) At the September 29 hike, Governor Bullock, per Goldman, “placed little focus on arguments which might have supported” a hold, “for example, the weakening housing market.”
Last week’s Senate testimony was more of the same. Bullock said “the labour market seems a little tighter than we previously judged” and that the NAIRU is “probably above where the unemployment rate is at the moment” (translation: expect more hikes, not fewer). The hedge funds got the message. Here is Goldman’s AUD rates desk in its Oct 28 market update (available to pro subs):
“Immediately after CPI, there was strong interest from hedge funds to add to their November RBA shorts with the meeting climbing from 15.5 to 22.5bp of hikes priced… the front end bid shifted out into the February 2027 meeting which is now priced at a 50/50 chance of another hike post November… With this increased hawkish intensity, it feels the RBA is unlikely to let up in its tightening campaign until it sees clear evidence of a meaningful slowdown in the hard activity data.”
Here’s why that matters more in Australia than almost anywhere else: fewer than 5% of Australian mortgages are on fixed terms, according to the RBA (as Bloomberg noted). Unlike in the US, where homebuyers typically take out 30-year fixed mortgages, every hike lands on Australian household budgets within weeks. Ask Chris Hanna, the 33-year-old Sydney investor Bloomberg profiled with a roughly A$6.5 million portfolio of four properties, who said another quarter-point hike would cost him “an extra couple of thousand dollars a month” and who is now thinking about selling one or two homes instead of buying a fifth. Multiply him by a few hundred thousand leveraged investors who just lost their negative gearing on future purchases, and you probably get September’s auction volumes.
Chasing The Floor
The most telling chart in this story may be the one tracking the forecasts. Before September, Goldman expected a 5% peak-to-trough decline in capital-city prices. Then, on September 3, it doubled the call:
“The RBA’s policy trade-off has become more difficult over the past month, as a deeper housing downturn has coincided with a still-resilient economy and a much firmer-than-expected July CPI print… We now expect house prices to fall by a historically large 9% peak-to-trough (GS prior: -5%), prompting us to lower our growth and labour market forecasts.”
– Goldman Sachs, “Australia & NZ Views: RBA To Tighten Into Deeper Housing Drag”Â
Prices blew through most of that within two months (they are now down 8.1%). So last Wednesday, after the CPI print, the bank cut again: “we now forecast a larger peak-to-trough fall in house prices of 12% (prior: 9%), slower 2027 GDP growth of 1.6% (prior: 1.8%) and a higher unemployment rate peak of 4.9% by end-2027.” It also pushed back the start of RBA easing to 4Q 2027. Westpac, meanwhile, now sees prices falling just over 10% peak-to-trough, which it says would be the largest decline since national price measures began in 1980 (with Sydney seen down 12% this year alone). “That risk is crystallising with turnover already down 20% and prices off 8%,” wrote Westpac’s Matthew Hassan.
Notice a pattern? The forecasts keep moving to where the prices are going, a month or two late. Now, to be fair, there’s a bull case, and AMP’s Shane Oliver made it to Bloomberg: prices “keep falling into the June quarter,” the RBA starts “making noises about potentially cutting interest rates through the second half of next year,” and that sets up “some sort of rebound in property prices through 2027 and 2028.” It’s also worth remembering that the last time a big Aussie bank turned this bearish, in 2022, CBA called for a 15% drop, and the actual drawdown stopped well short of that (it’s visible in Goldman’s chart above) before the RBA pivoted and the boom resumed.
The difference this time? In 2022-23 the RBA was hiking into a market where investors still had their tax breaks and inflation was about to roll over. In 2026, the investor bid has been legislated away, oil is still elevated thanks to the Iran war, and the RBA itself keeps telling anyone who will listen that inflation will be higher than it forecast. CommBank’s Belinda Allen, who also expects 4.85% on Tuesday, put it bluntly: “the RBA has picked a side and is leaning into the fight.”
Meanwhile the banks are already fighting over scraps. According to Goldman’s Sydney futures desk, CBA just launched a mortgage rewards program, including tokens for phone bills and travel, “as the country’s lenders vie for a dwindling pool of customers amid the fastest housing slump in a generation.” Free phone credit with your jumbo variable-rate mortgage: surely that will stem the tide.
Catastrophic? Ask Anyone Holding 60% Of Their Wealth In Bricks
So is “catastrophic” really on the table? Maybe not tomorrow, but for a country where property is the household balance sheet, the banking system’s main asset and the government’s favorite policy lever, a 12% decline would be bad enough. The transmission is unusually direct: variable-rate mortgages, a central bank that has explicitly declined to weigh housing, falling turnover that hits stamp-duty revenue and construction, and a private-credit-funded developer sector that is already cracking. Even the RBA’s chief economist Sarah Hunter acknowledged in September that falling prices would weigh on the economy through lower turnover, wealth effects and construction activity, before adding that the RBA “wouldn’t expect right now to see a recession or anything like that in the economy.” Which is probably what every central bank says right up until it does.
As Bloomberg noted, “there are few recent examples of countries trying to tackle overheated housing markets without seeing a sustained slump”: China is five years into a property crisis, New Zealand’s boom turned into a prolonged downturn, and a 20% plunge in Canadian home prices still hasn’t fixed affordability there. Australia is now trying to deflate one of the frothiest housing markets on the planet while hiking rates into a stagflationary energy shock. Our bet: Goldman’s -12% gets revised again before this is over, and the “supply crisis floor” Hauser described in September will prove about as durable as his “prices are still 3% higher than a year ago” argument did.
Then again, as one Castle Hill seller told Bloomberg after slashing his asking price by A$300,000-A$400,000 to sell to the only bidder who showed up: “We decided to take the money and run.” Probably good advice. The RBA decides on Tuesday at 2:30pm AEDT (10:30pm ET Monday), with the latest house price print already in hand. We doubt it changes their mind.
Much more in the full Goldman Sachs “Australia & NZ Views: RBA To Tighten Into Deeper Housing Drag,” “Australia: CPI: Underlying inflation increases +1.0%qoq” and “Cotality House Prices: Price falls broaden further in September” notes, all available to pro subs.
