Commonwealth Bank warns of economic slowdown as falling house prices bite

Falling house prices is tipped to be the latest blow to the Australian economy, but there could be a silver lining for frustrated mortgage holders.

Commonwealth Bank forecasts Australia’s economy will slow in the second half of the year, with GDP forecast to grow by just 1.5 per cent for the full calendar year to 2026.

CBA’s head of economics Belinda Allen said the risks had moved from the Strait of Hormuz to a falling property market.

“The impact of the war in Iran was less severe than we originally expected. Oil prices peaked lower and a cut to the fuel excise tax bufferedhouseholdscompared to our expectations in March,” she said.

“But a deterioration in the housing market is now expected to offset the better starting point for household incomes to still see household spending slow into year end.”

According to Commonwealth Bank in the months since the May budget, Australia’s housing market has been under pressure.

Ms Allen pointed to Sydney house prices, which fell 1.2 per cent in June and 3.2 per cent over the quarter, while Melbourne was down one per cent over the past month and 2.6 per cent in the past three.

“Those were the largest one-month falls for both cities since August 2022,” she said.

“The mid-sized capitals are still outperforming Sydney and Melbourne, but momentum has also slowed materially in these markets.

“House price growth has been weaker than expected since the Budget, with revisions to recent data reinforcing this loss of momentum.”

Despite avoiding the worst fears of the US-Iran conflict, Ms Allen still forecasts Australians to feel the impacts of cost-of-living.

Commonwealth Bank predicts inflation to remain above 2.5 per cent until at least 2028.

Australia’s all important trimmed mean inflation rate – which the Reserve Bank of Australia watches as it strips out volatile items – came in at 3.6 per cent in the 12 months to May.

Meanwhile, headline inflation came in at four per cent for the 12 months until May, down from 4.2 per cent in April.

NED-9175-Australia's GDP

Both of these figures are above the Reserve Bank’s target of two to three per cent inflation.

At the same time, unemployment — which is currently at 4.4 per cent — is expected to peak at 4.8 per cent by the end of 2027.

But in a welcome reprieve for mortgage holders, Ms Allen said a weakening economy would allow the Reserve Bank to hold the cash rate for the rest of the year.

“For the interest rate cycle we maintain our view that the RBA will be on hold for the remainder of 2026,” she said.

“There are risks further tightening will be required late this year if growth is more resilient and inflation more persistent.”

Looking forward, Ms Allen predicted the next interest rate move would be a cut.

“We expect two rate cuts in 2027, which should help stabilise household spending and the housing market,” she said.

“This should see growth recover into late 2027 and the labour market stabilise.

“By the end 2027 we see GDP growth back to around potential at two per cent.”