In the July edition of ‘Two Minutes for Zagga’, Stephen Koukoulas, Zagga’s Economist In Residence, outlines an Australian economy entering a softer phase, with housing, inflation and interest rates at the centre of the outlook.
Two key themes are currently dominating the economic discussion: the downturn in housing and recent tax policy changes, with the latter expected to take effect from 1 July next year.
Housing market enters decline
Australia’s housing cycle has turned, with price declines now evident across several major markets.
Sydney and Melbourne are leading the weakening trend, with prices falling around 3–3.5% from their peaks, while Canberra has also joined the downturn. Adelaide is nearing flat conditions, and previously strong markets are showing signs of slowing growth.
The key question is how far prices may fall. Based on historical experience, Stephen notes, “the fall should be of the order of 7%, plus or minus a small amount,” to restore some affordability and bring first home buyers back into the market.
At the same time, investor demand for established dwellings appears to be easing, influenced by upcoming tax changes.
Implications for construction and supply
The cooling housing market may also affect new supply. Developers are likely to reassess project viability if declining prices begin to impact expected returns. This could result in delays or postponements of building approvals and project commencements.
This dynamic remains ongoing, but it suggests that supply-side responses may lag the initial slowdown in housing demand.
A softer consumer backdrop
Beyond housing, the broader economy is showing signs of moderation. Household spending has eased, particularly once volatile components, like petrol, are excluded.
Consumer sentiment remains weak but has shown a modest improvement in recent weeks. This shift in sentiment is important, as it can act as a leading indicator for future spending behaviour.
Investment holds up
One area of resilience is business investment, which continues to support economic activity in areas including:
- Data centres, attracting attention due to its scale,
- Warehouse construction, driven by continued growth in online retail and logistics,
- University accommodation, supported by strength in international education.
These sectors highlight how structural shifts in consumption and services are influencing investment trends.
Inflation still above target and interest rates likely on hold
Despite signs that inflation may be peaking, it remains above the Reserve Bank of Australia’s target. Headline inflation is still around 4%, with underlying measures closer to 3.5%, compared with the RBA’s 2.5% target.
While inflation momentum appears to be consolidating, a sustained decline is required before it aligns with policy objectives. The RBA has already lifted rates three times in the first half of 2026, and those increases are still filtering through to the economy.
Given the mixed signals — slowing growth on one side and persistent inflation on the other — the current stance is broadly one of pause. “Rates are on hold,” with the central bank balancing concerns around economic activity, rising unemployment risks, and inflation remaining above target.
While it is premature to anticipate rate cuts, the bias of any potential move, if it were to occur, may still lean upwards rather than downwards.
A gradual cooling, not a collapse
Overall, the Australian economy is transitioning into a slower phase of growth. Housing is weakening, consumer demand is softening, and inflation remains elevated. However, there are no clear signs of a severe downturn. Importantly, the outlook suggests a period of adjustment rather than a sharp correction, particularly in the housing market.
As Stephen highlights, while forecasts of large declines have emerged in some commentary, the more likely scenario is a moderate and manageable downturn rather than a “melodramatic house price crash.”
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Stephen Koukoulas is Managing Director of Market Economics, having had 30 years as an economist in government, banking, financial markets and policy formulation. Stephen was Senior Economic Advisor to Prime Minister, Julia Gillard, worked in the Commonwealth Treasury and was the global head of economic research and strategy for TD Securities in London.
