Why Falling House Prices Still Aren't Making Homes Affordable

Six months ago, Australia's property market was defined by eye-watering headlines: a rundown house in Sydney's south-west selling for $2 million, a packed auction in Strathfield fetching $8.6 million, and viral clips contrasting today's prices with a $6,000 mortgage from the 1970s. Now the story has flipped. Auction clearance rates have thinned out, some agents report the quietest activity they've seen in years, and commentators are openly using words like "correction", "crash" and "collapse".

On paper, that should be good news for buyers. In practice, a fresh affordability study has found Australia is the worst-ranked country in the world for housing affordability, the only nation with five capital cities on a list of the least affordable markets globally. Sydney placed second overall, behind only Hong Kong. The study points to the core problem: prices are falling, but affordability isn't improving.

Part of the reason is interest rates. The Reserve Bank of Australia has lifted the cash rate for a fourth time this year, pushing it to the second-highest level in the developed world. Higher rates mean bigger mortgage repayments and banks willing to lend less, squeezing borrowers from both sides. The RBA governor has also faced pointed questions over whether government spending is adding to inflationary pressure that rate rises are meant to control.

Renters aren't being spared either. Vacancy rates remain low and people are moving less often, so competition for scarce rental properties keeps pushing rents higher even as property values fall. Meanwhile, the market itself has effectively frozen: buyers are wary of overpaying, sellers are reluctant to accept lower offers, and borrowers are hesitant to take on bigger loans. Unless forced to move, many Australians are simply choosing to sit tight.

The steepest price falls are concentrated at the luxury end of the market. Recent listings show a Sydney North Shore home cutting its asking price by close to $4 million, an inner-Melbourne property dropping $3.5 million, and a Byron Bay house falling $3 million. While dramatic, these declines do little to help ordinary buyers chasing ordinary homes, and they haven't fixed the underlying shortage of housing stock, a problem compounded by rising construction costs and builders going under.

The human toll is stark. Almost half of Australians under 30 are still living with their parents because they can't afford to move out, and nearly half of adults in share-houses are now over 40. Fewer than one in five Gen Z Australians believe they will ever own a home. Most forecasts expect the correction to run into 2027, with no analyst predicting a quick rebound.

Perhaps the most sobering detail: economists note that even the most dramatic worst-case price forecasts would only return Sydney's property values to where they sat in 2023 — a year Australia was already in the grip of a housing crisis. Falling prices, on their own, don't tell the whole affordability story.