The housing downturn is now broadening across cities and price points. How far prices can fall from here depends on a variable that most of the conversation has not caught up with: the cost of building a replacement home.
Australia’s housing downturn is now underway. Higher interest rates have reduced borrowing capacity, lifted mortgage repayments and weakened buyer confidence. The federal Budget has added further uncertainty, particularly among investors, while homes are taking longer to sell and vendors are increasingly having to adjust their expectations.
The pace of decline accelerated in July. Cotality’s Home Value Index shows national dwelling values fell by 0.7 per cent over the month and 1.9 per cent over the quarter. Houses recorded the larger falls, declining by 0.8 per cent in July and 2.0 per cent over the quarter, compared with falls of 0.5 per cent and 1.4 per cent for units.
The premium end of the market has been weakening for some time because it is more sensitive to higher interest rates and reduced borrowing capacity. That is continuing, but the downturn is now broadening both geographically and further down the price spectrum. Brisbane has moved into decline, Adelaide softened in July and Perth has edged lower over the past three months. The cheaper end remains supported by first home buyers using the five per cent deposit scheme, but weaker investor demand following the Budget means that support is no longer sufficient to fully insulate it from the broader slowdown.
Prices are likely to fall further. However, a dramatic national decline remains unlikely because Australia can no longer build housing cheaply enough to support materially lower prices.
The latest ABS data shows house-construction output prices rose by 2.0 per cent in the June quarter, the largest quarterly increase since September 2022, and by 5.9 per cent over the year. Rather than easing, construction-cost growth has accelerated again.
The cumulative increase is even more important. Nationally, the cost of building a new house is now 51 per cent higher than at the end of 2019. Costs have more than doubled in Western Australia, while rising by around 69 per cent in Tasmania, 65 per cent in South Australia and 61 per cent in Queensland. Even Victoria, which has recorded the smallest increase among the major states, is 35 per cent higher.
This is important because existing homes cannot remain materially below replacement cost across the market for long. When established housing becomes cheaper than delivering new supply, projects stop stacking up. Construction slows, fewer homes are added and the shortage becomes worse. Buyers are then pushed back towards established housing, limiting how far prices can sustainably fall.
The apartment market is where this gap is most clearly visible. The ABS figures relate specifically to detached-house construction, but the same pressures are affecting apartments and are likely to be even more pronounced. Apartment projects involve longer construction periods, greater financing and compliance costs, and more complex labour requirements. At current costs, very few genuinely affordable developments are viable. The projects that proceed are increasingly premium developments aimed at wealthier buyers, rather than the lower-priced supply needed by first home buyers.
The gap between established prices and the cost of delivering new housing is therefore likely to widen as the downturn continues. But this will not produce a wave of cheaper new homes. It will cause more projects to be deferred or abandoned, particularly at the affordable end where margins are already extremely tight.
Higher interest rates push existing prices lower, but they also make new supply harder and more expensive to deliver. As construction slows, the shortage becomes more severe and demand is redirected back towards established homes.
Replacement costs will not prevent larger falls in individual suburbs or properties. But nationally, they place a powerful limit on how far prices can decline.
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