Morgan Stanley has had another look at Australian housing, and the new number isn't great reading. The investment bank's economists now expect national home values to fall 10% to 15% from their peak, up from the 5% to 10% decline they pencilled in after May's federal budget, with no turnaround likely before the second half of 2027.
The revised call, in a client note from a team including economist Chris Read, would make this the steepest housing correction Australia has seen in roughly four decades. The bank said its earlier forecast, an outlier when it was published, had been borne out by the data since, but that "the backdrop has worsened".
Most of that worsening comes down to interest rates. The Reserve Bank has lifted the cash rate four times this year, to 4.60%, and deputy governor Andrew Hauser told a Citi conference in Sydney on Wednesday that the inflation outlook looks materially worse than the bank expected in August. Traders responded by pricing in roughly a 40% chance of a fifth increase when the board announces its decision on Melbourne Cup day, 3 November.
The bank laid out two paths. If the RBA sits tight from here, it expects a fall at the shallower end of its range, around 10%. If the bank keeps tightening the way markets expect, the slide pushes towards 15%.
Part of the damage is already done. Cotality's national Home Value Index fell 1.1% in September, a sixth straight monthly decline, leaving values 5.2% below their March peak. Separately, the Australian Bureau of Statistics reported last month that the total value of the country's homes dropped $34.1bn in the June quarter to $12.7tn, the first quarterly fall since 2022.
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The bank's economists watch five signals that have historically marked the bottom of a housing cycle: markets pricing in rate cuts, governments loosening policy, sales picking up relative to new listings, stronger auction clearance rates, and buying getting cheaper compared with renting. In each of the five downturns since 2008, at least three were flashing by the time prices bottomed.
Right now, none is, and none has been for nine months, according to the note. Morgan Stanley doesn't expect that to change before mid-2027.
It isn't a lone voice. AMP chief economist Shane Oliver has also warned the fall could reach 15%, with values bottoming around the middle of next year. He has also told the ABC that a drawn-out oil shock and rising unemployment could push the decline as far as 20%. At the time, Oliver said he thought rates had peaked, a view Hauser's comments this week have called into question.
For lenders mortgage insurers, a falling market is uncomfortable arithmetic. As prices drop, loan-to-value ratios rise, borrower equity thins, and the gap between what's owed and what a forced sale recovers gets wider. That gap is exactly what LMI pays for.
The reassurance, for now, is that most borrowers are sitting on a decent cushion after years of growth. In its October Financial Stability Review, the Reserve Bank modelled a uniform 20% fall in prices from current levels and found only around 5% of mortgages would tip into negative equity.
The less comfortable part is that the LMI market, led by Helia and QBE LMI, hasn't been tested by a serious national downturn since the early 1990s, and several years of rising values have kept claims unusually low. Higher repayments test whether borrowers can keep paying. Falling prices test whether a sale covers the loan when they can't.
Helia, the biggest of them, is already under pressure from a different direction. It reported a 25% fall in first-half net profitt o $100m in August, with gross written premium down 44% to $61.6m after it lost Commonwealth Bank's new business. Its claims line stayed negative, reflecting the equity borrowers built up while prices were rising. That buffer can soak up a modest dip. Whether it holds through a 15% fall and rising unemployment is the test the next year will set.
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Home insurers face their own problem. A house that sells for 10% less next year won't cost 10% less to rebuild: Insurance Council of Australia analysis puts the rise in building costs at about 30% over the five years to March 2026, well ahead of consumer prices.
Brokers have been warning for months that clients who feel poorer may try to trim their premium by cutting their sum insured, and after several years of rising home premiums, the temptation is obvious.
Investors add another layer. From July 2027, negative gearing will be limited to newly built homes, and a new minimum tax rate of 30% will apply to capital gains, changes Morgan Stanley has said will reshape how households weigh property against other investments. The market is already thinner: Cotality estimates sales in the three months to September ran 19.1% below a year earlier, while the national rental vacancy rate has climbed to 2% from a record low of 1.5% in February, which matters for landlord cover and rent-default claims.
If investors swap established homes for new builds, landlord and strata books could tilt towards newer apartments and house-and-land product, bringing questions about defects, builder solvency and surety with them. Construction insolvencies have already more than doubled in recent years, reaching 3,475 in 2025-26, according to Ai Group analysis.
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Next week's September-quarter inflation figures will weigh heavily on the RBA's 3 November decision, and Cotality's October index lands at the start of next month. Helia is also expected to update the market on its third quarter in the coming weeks, which should give the first hard read on whether arrears are starting to bite.
For brokers, the practical job is the renewal conversation: getting clients to separate what their home would sell for from what it would cost to replace. Those placing professional indemnity for mortgage brokers may also want to check limits and notification clauses, since claims against advisers tend to surface after a market turns, not before.
The RBA board meets on 2 November. Whatever it decides, the distance between what Australian homes would sell for and what they would cost to rebuild is unlikely to close quickly.
