With national property values down by 5.2% in September from their March peak, Australia’s housing market is in a distinct downturn. This has sparked concerns voiced by the opposition leader, Angus Taylor, of a housing market “in freefall”.

Translated into dollar terms, using the Domain property price series, the price of a typical home has dropped to about what it would have fetched one year ago.

Let’s put that price decline further into perspective.

What’s behind the change in sentiment?

The fall in house prices is controversial partly because of the link to the property tax reforms announced in the federal budget in May.

Importantly, though, the current market down cycle was already well established in most parts of Australia before that, following the first official interest rate rise in February. Prices peaked in March and have now fallen for six straight months.

Experts at Treasury estimated the tighter rules on negative gearing and capital gains tax unveiled in the budget would dampen prices only about 2% over “a couple of years”. That’s in line with earlier independent analysis. We should assume those expert judgments are valid.

Much of the long-term run-up in house prices was fuelled by generally declining interest rates over three decades to 2020; each rate cut boosted buyers’ borrowing capacity. That suggests interest rate hikes have been the key driver of this year’s price drop.

Prices have further to fall

The Reserve Bank of Australia raised rates last week for the fourth time this year, and financial markets expect at least one more rate........

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