Australia’s housing market is entering a more uncertain period, with house prices beginning to fall in some major cities. But while higher interest rates are putting pressure on property values, they are only one part of a much larger story.

Nationally, the median house price has increased by around 35 per cent since reaching a low in February 2023. That growth occurred even as interest rates rose, highlighting how strongly other factors have influenced the market.

The recent downturn has been linked to three interest-rate increases this year, alongside changes to negative gearing and capital gains tax settings that have encouraged some investors to leave the market. A 10 per cent decline from this year’s peak would be significant, given that the largest national falls over the past five decades were around 8 per cent.

However, the longer-term outlook remains difficult to predict.

Australia’s housing affordability problems are also closely connected to supply and demand. High construction costs, weaker dwelling approvals and shortages of skilled construction workers have limited the ability to build enough homes.

Migration is another major factor. Strong population growth has increased demand for housing, while efforts to reduce migration could potentially worsen construction shortages if fewer skilled workers are available to build new homes.

Meanwhile, the global economic environment is changing. The era of exceptionally low interest rates that helped drive property prices higher appears to be ending, with government debt, defence spending and the rapid expansion of artificial intelligence infrastructure contributing to higher demand for capital.

AI is also creating enormous demand for computing infrastructure and data centres, potentially reshaping investment and employment in the years ahead.

The key takeaway is that Australia’s housing market cannot be explained by interest rates alone. Borrowing costs matter, but population growth, construction capacity, government policy and housing supply will all play a crucial role in determining where property prices go next.