How Far Can Australia's Property Market Actually Fall?

In this episode of the Follio Property Podcast, hosts Reece Beddall and Lachlan Delahunty dive into the cooling Australian housing market, comparing its downturn to recent property declines in New Zealand and Canada. They unpack key drivers like rate hikes, tax policy shifts and immigration trends, and explain how tracking the relationship between rental yields and the cost of money can help identify market bottoms. The hosts also discuss investment opportunities emerging from distressed sales, weigh the risks of regional versus capital city properties and share practical strategies for securing discounted deals.

Key Takeaways & Market Insights

• Macro Economic Shocks: The worst of the macro market shocks is over, predicting monthly Sydney price falls will slow from -2% to between -1% and -1.5% as the market moves into 2027.   
• Global Property Comparisons: While New Zealand and Canada fell by 30% and 20% from their peaks after massive runs of 164% and 150% growth since 2022, Australia’s market grew by only 40%, meaning it is coming off a significantly lower base.   
• Impact of Policy Changes: Changes to tax policy and negative gearing in the May budget caused market sentiment to shock, with the damage estimated to be equivalent to a 75 basis point rate hike.   
• Identifying the Market Bottom: Residential property prices typically reach their floor when rental yields rise to or exceed the cost of money (interest rates), as seen in Melbourne units and Darwin.   
• Capital Cities vs. Regionals: Investors are advised against regional markets like Ballarat or Gladstone unless they offer yields 3% to 4% higher than capital cities to properly compensate for lower job security and population growth.   
• Distressed Buying Opportunities: Financial stress from high debt is creating opportunities to buy properties at discounts of 20% to 50% below peak values for buyers with strong cash positions.   
• Listing Search Tactics: To find motivated sellers and negotiate lower prices, investors should reverse property listings on Realestate.com to search from “oldest to newest”, targeting properties sitting on the market for 6 to 9+ months.

Global Market Base Comparisons

While international property markets saw severe pullbacks, Australia’s market is built on a much lower growth base. New Zealand and Canada experienced dramatic drops after extraordinary multi-year runs.

“New Zealand down 30% and Canada down 20%. However, the variable I want to throw out here is they did run a lot harder than Australia in terms of price growth perspective.” – Lachlan Delahunty

“since 2022, New Zealand went up 164% and Canada went up 150% versus Australia’s 40% big variable.” – Lachlan Delahunty

“when you’re looking at something, we talk about coming off a high base or coming off a low base, they’re coming off a significantly higher base.” – Lachlan Delahunty

Pinpointing the Market Floor & Yield Dynamics 

Determining when a market has hit its bottom requires looking past headlines and tracking rental returns directly against the prevailing cost of debt. When rental yields align with interest rates, prices naturally stabilise. 

“when the yield curve on any particular asset class falls to the cost of money, that is typically when prices won’t get any cheaper.” – Lachlan Delahunty  

“essentially, when rental yields get to the point at or above the cost of money, properties will effectively reverse in terms of their capital growth.” – Lachlan Delahunty  

“In my opinion, they will not fall any further than the yield line. So in a market where you’re seeing yields above 6%, it is very unlikely you’re going to see significant price falls.” – Lachlan Delahunty

Capitalising on Distressed Property Sales

Financial strain on over-leveraged owners is creating distinct buying opportunities for investors with strong cash positions. Rising debt costs are forcing urgent sales, allowing liquid buyers to acquire properties at significant discounts.

“People have bought at the peak of the market. They can’t service their debt. And we’re seeing this take place.” – Lachlan Delahunty

“we could be talking 40, 50% discounts on opportunities because of the need to sell and sell very quickly. And if you are in a position financially where you can take advantage of them, that’s when you get, you know, five, six, seven times returns because you’ve bought at a really bottom point in the market.” – Lachlan Delahunty

Future Predictions & Market Outlooks

• Slowdown in Declines: Sydney price falls are expected to ease from -2% to between -1% and -1.5% per month into 2027.
• Policy Headwinds: May budget changes to negative gearing act like a 75-basis-point rate hike, dampening buyer demand.
• Migration Floor: Federal immigration settings will continue to support underlying housing demand over the next two years.
• Price Bottom: Markets with yields hitting 6% or more (matching borrowing costs) are projected to stop falling.
• Distressed Buying Growth: Prolonged high rates will force over-leveraged sellers to liquidate, expanding heavily discounted opportunities for cash buyers.

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