A major bank revised its national housing price forecast from -3% to -6% for 2025 in a single quarter, with the total peak-to-trough correction now expected to reach 7.3%. That matches the depth of the 2022 rate-hiking cycle downturn, but this time the mechanics are different: sustained high borrowing costs rather than a rapid shock, and supply constraints preventing a clearout that would reset the floor faster.
The revised numbers put Sydney at -10% peak-to-trough and Melbourne at -8%, erasing three and six years of gains respectively. Top-tier Sydney houses have already dropped 9.5% over twelve months. Brisbane and Perth are forecast to hold modest gains, 2% and 3%, because supply remains tight and investor activity cooled before prices ran too far ahead of fundamentals.
What changed between June and now
Three months ago the same bank projected a -3% national fall. The doubling to -6% for 2025 reflects two data points that firmed up over winter: buyer demand stalled harder than expected once the spring selling season failed to materialise, and sales volumes are now tracking toward a 24% annual drop instead of the earlier 20% estimate.
The fragility shows up in thin on-market listings. Historically low stock levels are masking the demand collapse, if vendors held and waited in 2022, they’re doing it again now, which keeps advertised supply tight but doesn’t prevent price discovery from resetting lower when transactions do occur. The forecast assumes this pattern continues: listings stay suppressed, but the deals that close reflect weaker clearing prices as buyers pull back or lose serviceability.
Interest rate expectations are the pivot. The forecast is built on rates staying elevated through mid-2026, with cuts only arriving once inflation proves durably lower. If that timeline extends, wage growth stays sticky, services inflation doesn’t break, the 7.3% trough estimate becomes a floor, not a ceiling.
The equity and serviceability math
A 7.3% national fall translates unevenly depending on when you bought and how much you borrowed. Someone who purchased Sydney property in early 2024 near the local peak with a 10% deposit now faces material negative equity if the -10% forecast plays out. A 5% deposit buyer from the same window is underwater by roughly 15% of the original purchase price, assuming no principal paydown yet.
That equity loss doesn’t trigger a margin call, lenders don’t force sales unless you default, but it removes refinancing options and locks you into your current rate when the fixed period ends. Refinancing rejection rates have already doubled in six months as serviceability buffers bite borrowers who stretched at the peak.
Borrowing capacity shrinks in parallel. A buyer approved for $800,000 eighteen months ago at 5.5% can now borrow roughly $720,000 at 6.8%, assuming income stayed flat. If property prices fall 7% but your maximum loan size drops 10%, you’re not gaining purchasing power, you’re watching the gap between what you can afford and what’s available stay roughly constant or widen if vendors don’t adjust asking prices fast enough.
The catch
Falling prices don’t automatically mean better affordability if credit conditions tighten faster than values drop. The 2022 cycle showed this clearly: national prices fell 7.3% peak-to-trough, but first-home buyer activity stayed subdued because serviceability tests at higher rates wiped out the price discount. This cycle could follow the same script if lenders keep the 3% assessment buffer in place and wage growth doesn’t accelerate.
What could change the trajectory
Three variables could shift the forecast materially:
- Rate cuts arriving sooner than mid-2026. If inflation breaks faster and the RBA cuts by Q1 2026, demand stabilises before the full 7.3% correction plays out. The forecast assumes no cuts until H2 2026.
- Listings surge. If vendors capitulate and flood the market, driven by mortgage stress, divorce, relocation, developer settlements, the thin-trading dynamic breaks and prices adjust faster but potentially deeper in a short window.
- Migration shock. Net overseas migration has been running above 300,000 annually. A sharp policy-driven cut to that figure removes the demand cushion in markets like Melbourne and Brisbane where rental yields are alreadycompressing.
The base case holds if current settings persist: rates stay elevated, listings stay suppressed, buyer demand grinds lower but doesn’t collapse. The downside scenario, where the 7.3% becomes 10%-plus, requires a credit event (sharply higher unemployment, a wave of forced sales) or a listings glut that overwhelms thin buyer interest.
The two-year view and who it hits hardest
Sydney’s forecast -10% fall wipes out gains back to late 2021. Top-tier houses lead the correction because they stretched furthest during the 2020–2023 run and now face the thinnest buyer pool as borrowing limits compress. Units in the same markets are falling slower, less speculative froth to unwind, and offshore buyer interest provides a partial floor in some precincts.
Melbourne’s -8% forecast takes values back six years, reflecting the sustained underperformance since 2017. Interstate migration outflows and apartment oversupply in the CBD fringe mean the recovery timeline extends well past Sydney’s even if both bottom at the same time.
Brisbane and Perth hold because supply hasn’t caught up to demand yet. Brisbane’s forecast +2% gain assumes the 30% jump in listings since May absorbs some heat but doesn’t tip the market negative. Perth’s +3% reflects four consecutive monthly declines moderating what was an unsustainable run, a slowdown, not a reversal.
Adelaide’s +3% is the outlier: investor activity has pulled back sharply, but owner-occupier demand from interstate migrants keeps the market stable. That dynamic only breaks if migration policy shifts or if affordability deteriorates to the point where Adelaide loses its relative value advantage.
Timing decisions around the forecast
If you’re holding and can service the loan comfortably, the forecast doesn’t force action. Prices falling 7% over two years isn’t a wipeout, it’s a correction that resets valuations closer to long-run income multiples. The wealth effect operates on perception as much as dollar value, and most owners ride through without selling unless external pressure (job loss, divorce, relocation) forces the decision.
If you’re buying, the forecast suggests waiting has limited downside risk through 2025 unless you’re targeting a market where supply constraints (Perth, regional Queensland) mean the best stock gets absorbed quickly. The risk of waiting isn’t that prices rebound sharply, it’s that the property you want sells to someone with stronger serviceability or a bigger deposit, and the next comparable listing is six months away.
If you’re selling by choice, upgrading, downgrading, relocating, the timing trade-off is between selling now into thin demand at a known clearing price versus waiting six months for conditions to improve but potentially facing more listings competition and a lower floor. There’s no clean answer; it depends on your urgency and your alternative (renting, bridging finance, deferring the move).
What this tells you about credit and construction
A 24% drop in sales volumes flows through to every part of the transaction chain. Mortgage brokers see fewer submissions, conveyancers book fewer settlements, and lenders write less new business even as refinancing activity stays elevated. Broker commission structures are already under pressure, and a sustained volume drought accelerates consolidation in the channel.
Construction activity slows in parallel. Developers who bought sites in 2022–23 expecting mid-2025 presales now face weaker buyer interest and tighter debt serviceability among off-the-plan purchasers. Settlement risk rises, if 10% of presale buyers can’t settle because their borrowing capacity shrank or their deposit (often another property) lost value, the project’s entire feasibility shifts. Expect fewer new launches through 2025 and more extended construction timelines as builders stretch the program to match slower sales absorption.
Start here
If you bought in the past 18 months with a deposit under 15%, model your equity position at a 7–10% price fall using your purchase price and current loan balance. If that puts you materially underwater, prioritise paying down principal over offset savings, reducing the loan-to-value ratio directly improves your refinancing options when your fixed rate expires.
If you’re holding off buying, set a price threshold and a timeline rather than trying to pick the exact bottom. Waiting for confirmation that prices have stopped falling means you miss the best buying window, which historically opens 3–6 months before the market visibly turns.
If you’re selling, get a range from three agents who’ve transacted in your street in the past 90 days, not agents quoting comparable sales from six months ago. Pricing to the current clearing rate, not the price you think it should be, determines whether you sell in 30 days or 120.
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General info, not financial advice.
