House Price Falls Gather Pace as Inflation Pressures Ease

There are three key issues in the Australian economy that are dominating the thinking of policy makers, businesses and the population more broadly:

• The economic slowdown has been confirmed.

• Inflation is too high even with signs of a slowing.

• House prices are falling – how far will they slide and will it matter?

The RBA has been using tight monetary policy to slow the pace of economic growth to ensure demand driven inflation eases and, in time, inflation returns to target. At the same time, policy makers want weaker house prices to improve affordability, especially for first home buyers.

There are clear signs that these policy reforms are working.

Evidence of the slowing economy are showing up in a moderation in household spending growth, a topping out in the number of new dwelling building approvals, slower government demand and weakness in exports. The main area of economic strength is business investment, which is a welcome development as it will help to lift productivity.

In terms of the specifics, household spending jumped 1.3 per cent in May after falling 1.1 per cent in April with the volatility linked to swings in petrol purchases, which in turn in linked to price issues and fears of shortages. The trend for spending, ex-petrol, is towards slower growth.

Since 2023, the unemployment has been trending higher. It hit 4.4 per cent in June. This is 1 percentage point higher than the 2022 low of 3.4 per cent. In something of an upside surprise, employment rose 76,000 in June, but the ABS noted a sampling change may have boosted the recorded level of employment.

Inflation remains too high. In annual terms, headline inflation fell to 3.8 per cent June, while the trimmed mean measure was steady at 3.6 per cent.  Headline inflation has fallen from a peak of 4.6 per cent in March and with some large monthly increases dropping out of the run rate in the months ahead, it should fall towards 3.0 per cent by end 2026. The economy needs to slow further to ensure the inflation rate hits the middle of the 2 to 3 per target band.

The number of new dwelling building approvals remains resilient rising 7.2 per cent in June and nearly 10 per cent over the year. In trend terms, approvals are at a 5 year high and are up 39 per cent from the 2024 low. While the number of approvals will fall short of the government’s 1.2 million 5-year target, there is an unambiguous upswing in new housing supply.

House prices peaked in March 2026 and since that top, Australia-wide house prices are down by 2 per cent, with larger falls of around 4 to 5 per cent in Sydney and Melbourne. Having boomed in the last two years, house prices are now falling in Adelaide, Perth, Brisbane and Canberra while the pace of increase has slowed appreciably in other cities and are set to turn negative in the near term.

In terms of the monetary policy outlook, the markets have reached the point where there is only a small chance of a final 25 basis point hike by end 2026. Some market participants are openly forecasting interest rate cuts in 2027 on the assumption that inflation decelerates on the back of the weaker economy and as the unemployment rises towards 5 per cent.

The recovery in New Zealand continues

Further progress in the economic recovery and concerns about the persistence of inflation saw the RBNZ hike interest rates by 25 basis points to 2.50 per cent in July. Current market pricing is for only moderate interest rate increases in the year ahead.

The recovery has been hampered by the oil price shock, although a turn in consumer spending and employment remain supported by still accommodative interest rate settings. The housing market remains subdued, despite low interest rates and is a key reason why the RBNZ is taking a cautious approach to hiking interest rates.

The national election will be held on 7 November and based on recent polls, the Opposition Labour Party are slight favourites to defeat the incumbent National Party. As is often the case in elections, there is a risk for some left-field policies that could impact markets.