The Two-Speed Correction
BGW Fortnightly Insight · Issue No. 7
This fortnight, BGW turn their attention to Australia's property landscape, where a structural budget repricing and a cyclical rate squeeze are colliding across residential, commercial and capital markets, creating a correction that is as uneven as it is fast-moving.
BGW's focus point
Housing is falling for two reasons at once. One was written into the May budget, the other into the cash rate, and only the second reverses when the RBA turns. Meanwhile institutional capital is quietly buying the assets residential investors are abandoning.
The market has clarified something the headlines had been circling since May: this is a cyclical downturn sitting on top of a structural repricing, and the two are compounding.
The cyclical piece is familiar. Three rate rises this year have left the cash rate at 4.35 per cent, and transmission is finally showing. National dwelling values fell 0.7 per cent in July, the steepest single month since December 2022, taking the median to $928,421. Sydney shed 1.4 per cent in the month alone, with close to $50,000 wiped from its median since the January peak. The Domain housing index June quarter figures put Sydney house prices down 3.3 per cent, the sharpest opening-quarter decline in more than three decades of data.
The structural piece is newer and far less reversible. The May budget stripped negative gearing and the 50 per cent capital gains discount from investors in established housing, replacing the discount with an indexation model. That is a permanent change to the after-tax return on a residential investment property, and is a direct lever the RBA has no control over.
ANZ's revision this week captured how fast the picture has deteriorated. The bank now sees Sydney values falling as much as 14.5 per cent peak to trough, the worst of any capital, with Melbourne at 12.8 per cent and the capital city aggregate at 10.6 per cent. Its 2026 forecast for the capitals more than doubled in eight weeks, from a 2.1 per cent decline to 4.3 per cent. Adelaide (9.8 per cent), Brisbane (7.9 per cent) and Perth (5.2 per cent) are now in the frame; the bank had not expected the smaller capitals to turn this early. NAB has cut to a 10 per cent peak-to-trough fall across Sydney and Melbourne, and Morgan Stanley has flagged a 10 per cent national decline, which would make this the largest housing correction in forty years.
Supply is the tell
The forward indicator is not price, it is stock. SQM Research counted 278,984 dwellings advertised nationally in July, up 12.4 per cent on June and almost 23 per cent on a year earlier. Domain's suburb-level data shows the west arriving late and fast: listings in Cockburn are up 89.8 per cent year-on-year and Joondalup 85.1 per cent, in a Perth market that had run 26 per cent in a year and has now turned down 0.3 per cent in a quarter. Toowoomba is up 83 per cent, Chatswood 85.3 per cent, Frankston 52.7 per cent.
What happens to price is almost the lagging part of this dynamic. Nicola Powell, Chief Economist, Domain
On that logic, the suburbs above have not yet delivered their falls.
The lever that isn't working
The recovery story assumes cuts. That assumption is the fortnight's biggest open question. Barrenjoey economist Jo Masters argues the August hold was a pause rather than a pivot, and that the next move is up, likely in November. The case rests on everything outside housing, as inflationary pressures are mounting: household discretionary spending running at its fastest pace in the fourteen years the ABS has measured it, excluding the pandemic; shovel-ready data centre approvals up from $2.7 billion in 2023 to more than $17 billion in the year to June; residential construction input costs up 2.1 per cent in the June quarter; and a 4.75 per cent Fair Work increase flowing into services prices from here.
Government policy to boost housing supply is, in effect, blunting the RBA's lever. Jo Masters, Barrenjoey
Building approvals have posted their strongest financial year since HomeBuilder despite falling prices and rising costs, because the 1.2 million homes commitment is holding the construction pipeline open. The channel through which rate rises normally slow the economy has been propped up by fiscal policy, so the bank has to push harder on the rate itself to get the same result. For property, that is the uncomfortable read: the structural drag on values and the fiscal support for construction are together pulling the RBA toward a higher terminal rate, which deepens the cyclical drag.
Where the capital went instead
Displaced money has to land somewhere, and recent data from the AFR showed two destinations.
Listed products. A record $6.8 billion flowed into Australian-listed ETFs in July, with income strategies, meaning high-dividend and bond products, taking more than a quarter. Year-to-date inflows of $36.5 billion put the industry on track to beat last year's $53 billion record, with assets under management at $371 billion across 494 products.
Commercial bricks. GIC's $450 million acquisition of 1 Market Street from Investa's flagship fund is the most definitive signal yet that Sydney office has changed. It follows Aware Super's $226 million half-interest in 100 Market Street and Centuria's $454 million half of World Square. National office deals ran $4.1 billion in the first half, up 15 per cent.
Melbourne is the exception, and the divergence there is structural rather than cyclical. CBD vacancy is stalled at 18.9 per cent against Sydney's 13.3 per cent, and annual Victorian office transactions have fallen more than 62 per cent since 2024. The state government is compounding it, vacating a further 100,000 square metres in FY28 as its public sector embeds remote work. The reprieve on the work-from-home bill is procedural: the bill still stands, which leaves Melbourne office exposed less to the rate cycle than to an election.
Hotels held up better than the macro backdrop implied. National occupancy edged from 71.1 to 71.7 per cent and average room rates rose 3.7 per cent to $248.41 across the first half. Sydney led, with occupancy at 80.3 per cent and rates up 7.3 per cent to $282.36, ahead of inflation.
General advice disclaimer: The information in this article is of a general nature and does not take into account your financial objectives, circumstances or needs. Consider your own situation before making a decision. Past performance is not a reliable indicator of future performance. Boston Global Wealth Pty Ltd | ABN 99 691 504 506 | CAR 1318023 | AFSL Advisory Circle Pty Ltd 513052.
Comments