This is what happens to the ASX 200 if house prices fall 10%

A lot can change in a month in the world of financial markets. It was only at the start of August that the ASX 200 was breaking out to fresh all time highs, led by oil prices easing, bond yield and interest rate expectations drifting lower, strong commodity prices, a solid start to US and Aussie reporting seasons… and the list goes on. 

Read the headlines from today and it's a completely different story: Brent has surpassed US$109 a barrel (the highest since May), long and short term bond yields all over the world are reaching multi-year highs, Fed and RBA hikes are becoming ever more certain and Aussie house prices are predicted to fall a whopping 10% from their peak.

These macro pressures have filtered into the ASX 200 too, which is down 6% from its peak on 6 August, giving back all of its gains for the year. At the same time, the S&P/ASX 200 Financials index is down over 10% and analysts are expecting things to get worse for the banks, predicting that the housing downturn has not been sufficiently priced into earnings consensus. 

All put together it paints a dire picture for the largest sector in Australia’s share market, but will the consequences stop there? This article examines how the experts see the housing downturn and whether it will hit other sectors similarly as hard.

Housing downturn entrenched?

In a note published late last week, Macquarie downgraded its housing call. The investment bank now expects national home prices to fall around 10% from their peak, roughly double the 5% fall previously. That call follows a run of housing data that already makes for ugly reading. 

The property analytics firm Cotality said its national index, which tracks dwelling values across every capital city and regional market, fell 0.9% in August. This was the fifth consecutive monthly decline, leaving values 3.6% below their March peak. July was worse still at -1.2%, the largest single-month fall of the cycle so far.

What started at the top end of Sydney and Melbourne has spread just about everywhere; 93% of capital city suburbs recorded a fall through winter, up from 45.8% over autumn. Sydney is down 7.1% from its February high and is now falling faster than it did during the 2022-23 correction.

It isn’t just prices, as sales volumes are running 15.5% below the same time last year, with Brisbane, Perth and Sydney all down more than 20%. As for supply, listings sit 24% above year-ago levels despite fewer new properties coming to market. The official data has caught up too, with the Australian Bureau of Statistics reporting on 8 September that the total value of Australia's housing stock fell $34.1 billion in the June quarter to $12.7 trillion, the first decline since September 2022.

Banks to be hit harder than first thought

What we already know is that every major bank reported a slump in mortgage applications after the May Budget changed the tax treatment of investment properties. Westpac's (WBC) post-budget run rate was down 20% on the prior quarter, with owner-occupier applications down 18% and investor applications down 26%. Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) both reported falls of around 15%.

The banks' own economists, in forecasts published alongside their August results, expect that to feed through into much slower lending growth, though they disagree on how much. WBC sees housing credit growth easing from 6.8% this financial year to 4.7% in FY27. CBA is guiding to 5% to 7%, and NAB is the most bearish, forecasting just 2.5% across the market, down from 6.7% this year.

Both Macquarie and Morgan Stanley sit at the pessimistic end of that range. Macquarie forecasts housing credit growth of around 3.5% in 2027, Morgan Stanley about 3%. Neither is far from NAB, but both are well below where CBA and WBC are guiding, and below where consensus sat before the Budget.

In short, volumes have slowed and credit growth is going to slow, both the banks and brokers agree there. But where Macquarie and Morgan Stanley part company with the market is on margins: they think it is still too optimistic. With less new business to win, the banks are left competing harder for borrowers who already have a mortgage somewhere else, which means discounting, and thinner margins on the loans they do write. 

Macquarie has FY27 margins for the majors sitting one to four basis points below consensus, and earnings one to four per cent below. Morgan Stanley expects margins to fall around six basis points between the second half of FY26 and the second half of FY27, and has cut its FY27 earnings forecasts for the majors by about 7% since the start of May. 

Both brokers expect credit quality to deteriorate from here, with Macquarie seeing upside risk to bad debt charges and Morgan Stanley warning there is little room for error in consensus loan loss forecasts. 

Macquarie is underweight the sector as a whole, with ANZ Group (ANZ) and NAB its preferred exposures, both rated Neutral. Morgan Stanley has ANZ overweight and CBA, NAB and WBC all underweight. The common ground is ANZ, which Morgan Stanley likes because its business mix leaves it less exposed to Australian conditions than its peers. 

What it means for ASX 200

Financials make up around 32% of the ASX 200 by market capitalisation, with the banks alone accounting for roughly a fifth of the benchmark, so a sustained de-rating of the sector would be difficult for the index to absorb. And the financials index has already fallen more than 10% from its August peak.

But the index isn’t just banks. The usual offset is S&P/ASX 200 Materials, which has carried the index through the past twelve months, rising more than 50% while the banks fell 4%. However, the Materials index also began to turn, now down 9% from its record high on 26 August. That means two sectors, that account for well over half the benchmark index, are falling at the same time.

Cracks starting to show elsewhere

The strain is beginning to show up in construction insolvencies too. Macquaries expects them to increase as the housing market deteriorates, and the sector has just had a reminder of what that looks like. Bathla Group entered voluntary administration on 25 August with around $3.2 billion of liabilities, largely funded by private credit, and roughly 2,000 homes under construction. Several private credit lenders subsequently moved to restrict redemptions or disclose their exposures, with La Trobe disclosing $38.1 million and saying it expected full recovery.

The major banks have no direct exposure to Bathla, and UBS, in an early September note, labelled the collapse a private credit event rather than a banking one. The risk to the banks is second-order, however: tighter non-bank credit, weaker developer confidence, and pressure on the value of the collateral sitting behind their own construction and development lending.

Conclusion: Some great insight here!

So, does the housing downturn break the ASX 200's back? On its own, probably not. What makes the past month uncomfortable is that housing is only one of several pressures to have landed at once, and the index has given back a year of gains in five weeks.

The next test comes on 29 September, when the RBA board meets to decide on the cash rate. A hike could push house prices lower still, slow lending further, and add to the pressure on borrowers already stretched – which is exactly the sequence Macquarie and Morgan Stanley have built their downgrades around. If the RBA holds, the banks get some breathing room. If it moves, the argument that the market has not finished repricing the sector gets a lot harder to dismiss.