Australia’s housing market is showing increasingly clear signs of cooling, with new mortgage applications falling sharply across the major banks. While the slowdown follows an extraordinary period of house price growth and record lending, economists are divided over how far the downturn has left to run.
Since the May federal budget, Australia’s four major banks have reported substantial declines in loan applications. Even so, the pullback comes after a historic lending boom, meaning credit is slowing from an exceptionally high starting point rather than disappearing altogether.
Here are five key trends that help explain the changing Australian property market.
1. Australia’s Post-COVID Housing Boom Outpaced Other Markets
Australia entered the pandemic with some of the world’s most expensive housing, but property values accelerated even further in the years that followed.
Australian house prices have risen by more than 50 per cent since COVID-19, according to data highlighted by AMP economist Diana Mousina. The increase was driven by several factors, including historically low interest rates, strong population growth through migration and persistent housing shortages.
The surge made home ownership increasingly difficult for many first-home buyers, particularly in expensive markets such as Sydney and Melbourne.
Housing affordability subsequently became an even bigger political issue, culminating in the federal government’s decision in the May budget to rein in tax concessions available to property investors.
2. Australian Households Carry Exceptionally High Debt
High property prices have been accompanied by substantial household borrowing.
Australian household debt relative to annual income ranks among the highest internationally. Challenger recently reported that household debt was equivalent to 114 per cent of Australia’s gross domestic product under another commonly used measure, placing the country behind only Switzerland.
Why Is Australian Household Debt So High?
Challenger chief economist Dr Jonathan Kearns has identified several structural factors.
Australians are comparatively likely to own rental properties personally and finance them with mortgages. In some overseas markets, rental properties are more commonly owned by corporations, institutional investors or not-for-profit organisations.
Mortgage offset accounts are also much more widely used in Australia. Kearns additionally noted that Australia is a wealthy country, and wealthier economies generally sustain higher levels of household debt.
3. New Mortgage Lending Surged Above $100 Billion — and Is Now Falling
The post-pandemic property boom produced an equally dramatic increase in mortgage lending.
UBS data shows the value of new home loan commitments exceeded $100 billion per quarter earlier in 2026. That was roughly double the level of lending recorded before the COVID-19 pandemic, when interest rates were subsequently cut to near zero and property demand surged.
Conditions are now moving in the opposite direction.
Higher interest rates, falling property prices and changes to investor tax concessions are contributing to weaker demand for mortgages. UBS forecasts quarterly new mortgage lending could decline by about 30 per cent from its early-2026 peak by late 2027.
UBS chief economist George Tharenou expects the decline to continue for almost two years, reflecting smaller loans as house prices fall alongside tighter lending conditions.
Even a 30 per cent decline, however, would largely return annual property credit flows towards levels seen only a few years ago.
4. Australians Have Been Taking Out Much Larger Home Loans
Rapidly rising property values have forced buyers to borrow substantially more to enter the market.
Australian Bureau of Statistics figures released last week showed the average owner-occupier mortgage in NSW reached $842,000 during the June quarter.
In Victoria, the equivalent average loan was $664,000.
These figures illustrate how strongly the size of Australian mortgages has increased during the recent housing boom, particularly in states where buyers face some of the country’s highest property prices.
Larger mortgages have also made households more sensitive to changes in interest rates, increasing repayments when borrowing costs rise.
5. Higher Interest Rates Are Reducing Borrowing Power
Interest rates have become one of the biggest constraints on the housing market.
Every time the Reserve Bank of Australia raises rates, banks generally reduce the maximum amount customers can borrow because higher repayments affect household serviceability assessments.
The RBA has increased interest rates three times this year, putting additional pressure on borrowing capacity.
Property Investors Face Additional Restrictions
Investors buying existing homes face another constraint following changes to negative gearing and capital gains tax concessions.
With investment properties providing fewer tax advantages under the government’s new arrangements, banks have reduced how much they are prepared to lend some new investors.
The changes are intended partly to make it more difficult for investors to compete for existing properties. Estimates suggest borrowing capacity for investors purchasing established homes could fall by as much as 20 per cent.
Interest Rates Could Determine When Housing Demand Recovers
Attention is now shifting towards how long the mortgage downturn will continue and what could eventually revive demand.
Interest rates are likely to be central to any recovery. Commonwealth Bank chief executive Matt Comyn said last week that rate cuts would stimulate housing demand, although CBA does not expect reductions until next year.
Australia’s housing and mortgage markets are therefore entering a significant adjustment after years of rapid price growth and expanding debt. Lending may fall considerably from its peak, but the scale of the preceding boom means mortgage activity could remain substantial even as property conditions continue to cool.
Cory Weinberg is a contributor to Sproutwired.com, covering a wide range of topics including news, politics, business, technology, sport, entertainment and lifestyle. He focuses on delivering clear, balanced reporting that helps readers stay informed about current events and emerging developments. Cory’s work highlights relevant stories, practical insights and important issues affecting communities and industries, with an emphasis on accuracy, clarity and information that readers can trust.
