House Prices Fall as Building Costs Create a Market Floor

Australia's housing downturn is widening across cities and price points, but soaring construction costs are limiting how far values can drop.

Australia's Housing Downturn Spreads — But Costs Are Putting a Floor Under Prices

Australia's housing market is in retreat, and the weakness is spreading. Data from Cotality shows national dwelling values fell 0.7% in July and 1.9% over the quarter, according to Australian Broker. Houses bore the brunt, recording a 0.8% monthly drop and a 2% quarterly decline, compared with 0.5% and 1.4% for units.

Ray White chief economist Nerida Conisbee says that while the premium segment has been softening for some time as higher interest rates squeeze borrowing capacity, the weakness is now spreading to markets that were previously holding firm. "Brisbane has moved into decline, Adelaide softened in July and Perth has edged lower over the past three months," she said.

The more affordable end of the market, long supported by first-home buyers using the five per cent deposit scheme, is also losing some of that support as investor demand cools following recent budget changes.

KPMG's Forecast: Falls in 2026, Recovery in 2027

KPMG Australia's latest Residential Property Market Outlook, reported by MPA Australia, now forecasts national house values will fall 1.1% over calendar year 2026 — a significant downward revision from the firm's previous outlook. Unit prices are expected to eke out 2.2% growth over the same period, supported by relative affordability and ongoing rental demand.

The steepest corrections are forecast in Melbourne, where houses are expected to drop 5%, and Sydney at -4.4%. Canberra is also projected to record a decline of 2.6%. Not every market is under pressure, though. Darwin is forecast to be the standout performer, with house prices rising 8.2% and units up 8.1%. Brisbane is expected to hold positive at 4.6% for houses, Perth at 6.4%, and Adelaide at 5.3%.

Recovery is projected for 2027, with national house prices expected to rise 3.4% and units 3.7%. KPMG's baseline assumes one further 25 basis point rate rise in 2026, taking the cash rate to 4.60%, followed by a single cut in the June quarter of 2027.

The June quarter of 2026 marked the first quarterly decline in national house prices since late 2022, with values falling 1.0% quarter-on-quarter. National house prices nonetheless grew 5.5% over the year to June 2026, while unit prices rose 6.6%.

Why Construction Costs Are Keeping Prices From Falling Further

Here is the factor that is putting a floor under national prices: building a new home now costs dramatically more than it did just a few years ago.

ABS data shows house-construction output prices rose 2% in the June quarter — the largest quarterly rise since September 2022 — and 5.9% over the year. Nationally, the cost of building a new house is now 51% higher than at the end of 2019. The increases have been even more pronounced in some states: Western Australia costs have more than doubled, Tasmania is up 69%, South Australia 65%, and Queensland 61% higher. Even Victoria, with the smallest increase among major states, is 35% more expensive to build in than before the pandemic.

Conisbee explains why this matters. "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," she said.

In plain terms: if established property values fall far enough below what it costs to build new, developers stop building and buyers shift back to the resale market — which stabilises prices. Conisbee notes this dynamic is even more pronounced in the apartment sector, where longer build times, higher financing costs, and compliance requirements are already pushing many affordable projects out of viability entirely. "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," she said.

What This Means for Borrowers Right Now

The softening market is creating real pressure for many borrowers. New home loan commitments fell 6.2% quarter-on-quarter in the March quarter of 2026, with first-home buyer loans dropping 6.7% to $17.9 billion. The HIA Housing Affordability Index has fallen to 54.9 — its lowest level since the index began — with the repayment-to-income ratio sitting at 54.6%, some 21.2 percentage points higher than in March 2020.

That said, KPMG notes the risk of widespread defaults remains contained. Data from Roy Morgan classified 29% of mortgage holders as at risk of mortgage stress in the three months to May 2026, below the 30.3% recorded in June 2024.

For existing borrowers watching values ease, refinancing often still makes strong financial sense. Even a modest rate reduction can add up to significant savings over the life of a loan. Use our refinance savings calculator to run the numbers, and compare the cheapest home loans currently available to see where the market sits today.

For first-home buyers wondering whether now is the right time to enter the market, the picture is nuanced. Values are declining in some cities, which means you may get more home for your dollar than a year ago. Use the borrowing power calculator to understand what you can realistically borrow at current rates, and check first-home buyer loan options to explore what support is currently available.

The data is clear: prices are falling in most capital cities, but a sharp national crash looks unlikely while construction costs remain at historically elevated levels. The current environment rewards borrowers who do their homework and compare their options carefully.