If history is any guide, Australia’s sharemarket is set to be an unexpected winner from the housing market slump, with falling property prices linked to higher returns on the local bourse over the past 40 years.
Research house Morningstar analysed the five housing market downturns since 1980 where national dwelling prices fell by at least 5 per cent, and excluding the global financial crisis in 2008, it found the S&P/ASX 200 Index climbed about 7.5 per cent on average during each housing slump.
“By the time housing found its floor, the sharemarket was higher – not even modestly down or flat, but outright higher,” said Morningstar’s market strategist Lochlan Halloway in a report to clients.
He said his findings matched local academic studies that showed a decline in house prices was followed by a rise in stocks as investors switched from property to the sharemarket.
“That does not mean every housing downturn is good for shares,” he said. “But it does help explain why, in milder episodes, the two markets have often leaned against each other rather than fallen together.”
House prices slipped 0.4 per cent across the country in June after three rapid-fire interest rate rises from the Reserve Bank of Australia and changes to negative gearing and capital gains tax, which, by Labor’s own admission, were designed to slow property price growth.
While the ASX 200 climbed about 0.5 per cent last month, it doesn’t necessarily mean the local bourse is out of the woods yet after its lacklustre performance during the 2026 financial year.
Australia’s big banks – all of which have big home loan books – make up about a quarter of the benchmark index, which leaves ASX investors exposed to the effects of a housing crunch.
Jonathan Kearns, chief economist at Challenger and the RBA’s former head of financial stability, who was cited in the Morningstar report, said solid house price growth in the years before a downturn often provided a buffer.
Coupled with a relatively low unemployment rate – which dropped to 4.4 per cent in May – it meant that for now, banks were insulated from a big wave of defaults if borrowers lost work and fell behind on their payments.
Bank bears
Even so, he warned the worsening economic conditions would impact the growth outlook for banks, as a projected rise in unemployment increased arrears and limited home loan growth.
“The banks are just going to be writing fewer new loans, and that’s going to impact their profitability and market valuation because they won’t be growing as quickly,” he said. “Those existing loans will season, but they’re not writing new loans to replace them.”
While the ASX’s financials sector has risen 4.2 per cent in the past month, brokers and fund managers are becoming increasingly bearish on the sector as Australia’s so-called housing “super cycle” looks to be drawing to a close.
Last month, short positions in the big banks soared to $11 billion, with hedge funds poised to profit on falling earnings as the housing market deteriorates.
Kearns said while the RBA’s rate rises were the “predominant driver” of the housing downturn – which he expected to result in house price declines of between 5 per cent and 10 per cent – the government changes announced in the federal budget had “accentuated” the drop.
The changes mean that negative gearing – which allows investors to write off losses on their asset against other taxable income such as their wages – will be reined in for residential property investors.
Meanwhile, changes to capital gains tax mean investors will be taxed on the overall increase in the value of an asset minus the portion of the gain that is attributable to inflation. Under the current system, an asset is taxed on just half of the increase in value, known as the 50 per cent discount.
The CGT changes – which apply to shares as well as property – are expected to trigger an increase in passive money in the Australian sharemarket above the impact of the budget on the housing downturn.
“If there’s any saving grace, it’s that the added negative impact of the federal budget on the housing sector, and business and consumer sentiment in general, has lessened the chances of further Reserve Bank rate hikes this year,” Betashares chief economist David Bassanese said.
But he said investors in the sharemarket could face a “a potentially prohibitively high effective tax rate” on their investment portfolios because the CGT changes stop them from offsetting losses on underperforming stocks against stronger returns made elsewhere in a portfolio.
Source: https://www.afr.com/markets/equity-markets/housing-downturn-to-lift-the-asx-but-bank-risks-still-loom-20260706-p60cv2