SYDNEY -- Australian home prices are plunging, as interest rate hikes and tax reforms aimed at curbing residential investment have dampened the market, impacting construction demand and casting doubt on the government's plans to boost housing supply.

Australia's Financial Review reported Oct. 1 that the country's housing market "is on track for its steepest downturn in four decades." The national median home price of around 899,000 Australian dollars ($625,000) in September was down 5.2% from its March peak, U.S. property data company Cotality reports.

The sharpest declines occurred in major metropolitan areas. Median prices in Sydney and Melbourne have fallen 6%-7% from a year earlier, and 8.6% from the February peak. Several private-sector financial institutions expect home prices to drop 9%-13% from their highs.

Rising interest rates are slowing housing demand. Australia's policy rate stands at its highest in 15 years while average mortgage rates have topped 6%.

The number of properties listed for auction has halved from a year earlier, and auction clearance rates have fallen below 50%. Unsold inventory has climbed roughly 20%, and more homes are taking over six months to sell.

Aside from brief corrections, Australian home prices have risen for decades, driven by immigration-fueled population growth and tax incentives for housing investment. Many Australians used those tax advantages to repeatedly buy and sell properties, building wealth in the process.

The median price of an existing detached house in Sydney quadrupled from AU$365,000 in 2002 to AU$1.48 million in 2026, the Australian Bureau of Statistics reports.

Prices briefly weakened during the coronavirus pandemic but surged again as life returned to normal. While many middle-aged and older Australians benefited from buying when the market was lower, younger generations grew frustrated as soaring prices put homeownership out of reach.

Seeking to ease those concerns, Australia introduced a housing assistance program for young buyers in October 2025, reducing the required down payment from 20% of a property's value to 5%.

Then in May, it unveiled broader housing tax changes aimed at curbing investment. The measures revised rules allowing losses on investment properties to be offset against wage income and scaled back preferential treatment of capital gains.

Shane Oliver, chief economist at Australia's AMP Limited, expects home prices to sink as much as 15% from their peak.

The downturn is hitting young buyers who entered the market under the government's support programs. While saddled with rising interest rates and heavy debt burdens, many find it difficult to sell because market values have dipped below their purchase prices.

The impact is spreading to new-home construction. Property developer Bathla Group, which collapsed in August, relied heavily on private credit to finance numerous projects, but rising costs and weak sales eventually exhausted its funding, forcing layoffs and construction stoppages.

"When established home prices fall but the cost of land, labour, materials, infrastructure, finance and regulation does not, fewer new housing projects are financially viable," the Housing Industry Association said in a September statement.

A slowdown in new investment could worsen future housing shortages and threaten the government's target of supplying 1.2 million homes over the five years through 2029.