After years of rapid growth, Australia’s housing market is beginning to cool. Auction clearance rates have softened, prices in Sydney and Melbourne are easing, and economists expect further modest declines over coming months. And whenever housing slows, the same question quickly follows: will the broader economy slow with it? The answer is probably yes – but not by much.
What does a slowdown mean for the economy?
Housing touches almost every part of Australia’s economy. Building homes supports construction, manufacturing and professional services. Buying and selling homes generates spending on furniture, appliances, renovations and removals. Rising house prices can also encourage households to spend more, while weaker prices can dampen confidence. But today’s market looks very different from previous housing downturns.
Australia is not experiencing one housing market but many. Sydney’s house prices have risen strongly since 2022, until recently, after a couple of dips over the past decade. We’ve also seen rapid house price growth in Perth, Adelaide and Brisbane over the past three years, reflecting strong population growth, tight housing supply and robust labour markets. But Melbourne, Hobart and the two territory capitals of Canberra and Darwin have softened over the same period.
Watching the jobs market
Nor are we seeing evidence of widespread financial distress. Households have undoubtedly felt the effects of higher interest rates and rising living costs, but the Reserve Bank’s loan-level data show that mortgage arrears remain low. Fewer than 1% of housing loans are more than 90 days behind in repayments. At the same time, most borrowers have built up substantial equity over recent years, and many remain ahead on their scheduled mortgage repayments. This provides important financial buffers against both higher borrowing costs and moderate falls in house prices.
The greatest risk is if falling house prices coincided with rising unemployment. So far, that has not happened. This would be the worst case scenario for new buyers, particularly those with very small deposits. Housing slowdowns can also affect the economy indirectly. Fewer home sales generally mean less spending on furniture, white goods and home improvements. Apartment developments, already under pressure from elevated construction costs, become less financially viable if sale prices weaken. This could constrain future housing supply.
The wealth effect
There is also the so-called “wealth effect”. When households see the value of their homes rise, they often feel more financially secure and become more willing to spend. Research by the Reserve Bank suggests changes in household wealth have a positive and persistent effect on consumption, particularly discretionary spending. Our analysis of Australian Bureau of Statistics household spending data similarly suggests discretionary spending tends to strengthen during periods of strong house price growth and weaken as housing markets cool. But history also suggests this effect is most pronounced during major housing downturns, rather than modest market corrections.
Taken together, these channels suggest a softer housing market is likely to weigh on economic activity at the margin. But a modest correction after several years of exceptional price growth is unlikely, by itself, to trigger a broader economic slowdown.
What about housing affordability?
And in any event, perhaps this is not the most interesting question. Australians increasingly agree that housing affordability has become one of the country’s biggest economic and social challenges. Yet we also tend to react negatively to any prospect of falling house prices. Behavioural economists have long recognised that people are more sensitive to losses than gains. If people judge current house prices as the benchmark for success, then even modest declines can be perceived as losses, even though values remain historically high. This creates what might be called the “tyranny of the status quo”. The gains of recent years quickly become accepted as the new normal, while even relatively modest price corrections are portrayed as economic failure.
Housing has become less affordable because prices have persistently grown faster than incomes. So improving affordability is unlikely to occur without slower house price growth or price declines. That does not mean housing crashes should be welcomed. Large, disorderly falls in house prices would damage households, lenders and the broader economy. But neither should every modest decline in prices be treated as a problem that must immediately be reversed. And this time, perhaps, price falls may not be politically damaging due to the widespread impact of the housing crisis.
Perhaps the deeper issue is that we have come to judge the success of Australia’s housing system by the wrong metric. Economists recognise that no single statistic can capture economic progress. Gross domestic product (GDP) remains an important measure of economic activity, but it should sit alongside broader measures of productivity, wellbeing, inclusion and sustainability. Housing deserves the same broader perspective. House price appreciation is an outcome of the housing market. It is not the purpose of the market – and nor should be wealth generation. The real objective must be a housing system that provides secure and affordable homes, supports sustainable construction, and remains accessible to future generations. Rising asset values matter, but they should not crowd out every other measure of success.
