What It Would Take for Australian House Prices to Fall

Property analyst Michael Matusik maps the seven conditions needed for a sustained price correction — and explains why most aren't in play.

With Australia's cash rate at 4.35% and the Reserve Bank signalling it is prepared to raise again, the question of what higher rates actually do to house prices has moved from theoretical to practical. A detailed analysis published this week by [Property Update](https://propertyupdate.com.au/what-would-make-house-prices-fall/) maps the seven conditions that would need to be in place simultaneously before Australian dwelling values declined in a meaningful and sustained way.

The author, Michael Matusik, director of independent property advisory Matusik Property Insights, builds his framework on a single premise: "Australian dwelling values fall only when borrowing power contracts hard enough, and for long enough, to seriously undermine demand. At its core, this is not a story about general sentiment, migration, or supply. It is a story about interest rates and credit."

How Rates Affect Borrowing Power and Prices

The mechanism between interest rates and house prices runs directly through borrowing capacity. As Matusik explains, as a rule of thumb, a 0.25 percentage point rise in mortgage rates reduces maximum borrowing power by around 4% to 5%. Stack multiple rises together and purchasing power collapses quickly.

Australia already ran this experiment after the COVID shock. Rapid rate increases produced a correction but not a collapse. Borrowers adjusted, buffers were absorbed and prices stabilised before rising again. The lesson Matusik draws is direct: short-term pain does not do it. Prolonged pressure does.

For rates to push prices meaningfully lower, they would need to rise several more times and remain elevated long enough to permanently reset what buyers believe they can afford. At the current cash rate of 4.35%, after three increases this year, that pressure exists — but has not tipped into the territory the analysis identifies as necessary for a genuine correction.

What would sharpen the impact considerably is not rates alone but credit rules. A lift in serviceability buffers, Matusik notes, "would cut borrowing capacity overnight, even if interest rates stayed flat" — making serviceability settings one of the fastest levers available to put genuine downward pressure on prices. But buffers have not tightened. "If anything, competition between lenders and political pressure around affordability are quietly pushing in the opposite direction."

The Seven Conditions That Would Need to Align

For a genuine sustained price correction, Matusik identifies seven conditions that would all need to come together:

**Rates rise repeatedly and stay high.** Not a cycle that reverses within a year or two, but multiple increases that permanently reset affordability expectations across the market.

**Serviceability buffers tighten materially.** This remains the sharpest policy lever and currently the one pointed the wrong way.

**Loan-to-income limits bite.** Australia's market is fundamentally a leverage story: "Prices rose not because incomes exploded, but because households were allowed to borrow higher and higher multiples of income." Capping those multiples would directly hit dual-income households and higher earners — precisely the cohorts that underpin demand in most metropolitan markets.

**Credit becomes scarce, not just expensive.** "There is a crucial distinction between expensive credit and scarce credit," Matusik writes. "Expensive credit slows buyers. Scarce credit removes them." Non-bank lenders filling the gaps that the major banks leave are keeping demand alive even at elevated rates.

**Incomes stop offsetting rate pain.** Higher rates reduce borrowing capacity; wage growth restores it. So far, income growth has cushioned the blow just enough to prevent a deeper correction. For prices to fall, borrowing power would need to shrink faster than incomes can compensate.

**Investor confidence breaks.** Investors do not sell simply because yields are tight. They sell when negative cash flow meets falling prices and refinancing becomes harder. "Higher rates combined with tighter credit and declining equity" are what actually trigger exits, not rate rises alone.

**Forced selling becomes widespread.** Matusik is blunt: "Distress does not cause housing downturns. It accelerates them." Australia is currently "nowhere near a national forced-selling cycle."

What This Means for Buyers and Existing Owners

Matusik's conclusion is the key planning assumption: "The housing market is unlikely to fall far, but it is also unlikely to run hard. Higher rates, tighter credit and stretched affordability mean the boom conditions of recent years are unlikely to repeat."

There is also a structural supply dynamic that acts as a floor under prices even when demand weakens. When prices drop below development costs, new construction stops: supply stalls, shortages worsen, and the undersupply problem that already exists in most Australian capital cities deepens further. That self-limiting mechanism is why Australian downturns have historically been shallow relative to the gains that preceded them — and why a genuine collapse requires a credit shock rather than simply higher interest rates.

For borrowers, the practical takeaway is clear. A dramatic price collapse is unlikely without conditions that are not currently in place. But that does not make the environment comfortable. Borrowing decisions made today should be stress-tested against the scenario where rates stay elevated for an extended period — not against an assumption that cuts arrive quickly.

Check what your borrowing capacity looks like at current rates with our [borrowing power calculator](/calculators/borrowing-power). For existing owners assessing whether their current loan still makes sense after three rate rises, our [refinancing options](/home-loans/refinance) page is a useful starting point. If you want to model what a further rate increase would mean for your monthly repayments before it happens, the [repayment calculator](/calculators/repayment) lets you run those numbers now.

Beyond 2026, Matusik's view is clear: Australian dwelling price growth will be "more pedestrian than spectacular." For borrowers, that is not just a forecast — it is a useful planning assumption for anyone entering the market or reviewing their position in it.