4 hours ago
5
Falling house prices could throw a multibillion-dollar curveball at the state budget, threatening to blow out Victoria’s record debt and delivering a reality check to an Allan government heavily reliant on property taxes.
Internal Treasury assumptions, which underpinned the state’s mid-year budget update in December, had been banking on a moderate rise in Melbourne property prices. However, a chorus of economists and banking analysts is now warning that the market has turned, with prices predicted to slide this year amid persistent inflation, high interest rates, and global instability.
The looming potential revenue hole comes as Premier Jacinta Allan faces scrutiny over a $4 billion spending spree committed in the past few weeks – including two months of free public transport and half-price fares for the rest of the year – as she prepares to lead Labor towards a bid for a historic fourth term in November.
On Sunday Allan maintained the state was on track to confirm a 2025-26 operating surplus at May’s budget, insisting that a growing economy would allow the government to drive down debt “as a percentage of the economy.“
The premier will announce on Monday a record $1.04 billion budget for statewide road maintenance and repair for the next financial year, which is $28 million more than this year’s allocation for resurfacing roads, filling potholes, removing graffiti and mowing verges.
SQM Research is forecasting Melbourne house prices to fall between 1 and 4 per cent in 2026. This represents a dramatic reversal from its November 2025 outlook, which predicted growth of between 4 and 7 per cent.
SQM attributes the softening market to “heightened risks” stemming from persistent energy shocks, accelerating inflation, and the potential for further interest rate hikes from the Reserve Bank of Australia.
The big banks are equally pessimistic. Last week, ANZ predicted that the combination of restrictive monetary policy and subdued consumer confidence would see Melbourne prices retreat by 1.7 per cent across 2026.
According to Cotality, Melbourne’s house prices have already declined 0.9 per cent since December, with the median price sitting at $982,876, following growth in 2025.
Victoria has Australia’s highest property tax-to-GSP ratio, according to the Parliamentary Budget Office. This reliance makes the budget uniquely vulnerable to market shifts, particularly in stamp duty, which was forecast to generate $10.1 billion this financial year in the government’s December update.
Michael Brennan, chief executive of the e61 Institute and former chair of the Productivity Commission, said the prospect of falling property tax revenue was a “watch point” for the upcoming budget.
“Stamp duty revenue is notoriously hard for states to forecast because of the volatility from both prices and transaction volumes,” said Brennan, who also previously served as a deputy secretary in the Victorian Department of Treasury and Finance.
“Past experience shows that transactions slow when interest rates are rising, and that relationship is strong in Victoria. This suggests that stamp duty revenue will have potentially significant implications for the overall budget position.”
The sensitivity of the budget to the housing market is detailed in Treasury’s own risk modelling. Officials have calculated that for every 1 per cent property prices fall below expectations in 2025-26, state revenue is slashed by $229 million, while debt is driven up by a corresponding $237 million. That impact intensifies annually to reach a $266 million loss by 2028-29.
The government’s December update assumed dwelling prices would return to historical average growth rates – which are typically cited around 6 per cent. If a 1.7 per cent annual decline played out this financial year, the gap between 6 per cent growth and the reality of a contraction represents a 7.7 per cent swing. Based on Treasury’s analysis, such a downturn could wipe as much as $1.8 billion from state revenue and add roughly $1.82 billion to the state’s debt pile in the 2025-26 period alone.
Any significant downturn in sales volumes – which is also expected to occur – would also hit the bottom line, costing $100 million of revenue and adding $103 million to net debt in 2025-26 for every 1 per cent below expectations.
David Hayward, emeritus professor of public policy at RMIT, said the current economic climate and housing slowdown suggested the government’s previous projections were now outdated.
“As long as regional conflict continues and energy prices are elevated, everything is going to slow down,” he said. “Going into the budget, the projections are going to be inferior to what they were last year.”
A spokesperson for Treasurer Jaclyn Symes said forecasts in the 2026-27 budget would reflect all changes in conditions since December’s update, including property market and monetary policy developments.
“We’ve grown our economy faster than any other state in the last decade – and that growth, and careful budgeting – means we are able to invest in cost of living relief while also delivering a surplus this year,” the spokesperson said.
Treasury had previously forecast land transfer duty to bring in $10.1 billion in 2025-26 and $10.6 billion the following year. Those figures relied on a “return to growth” in residential values that is now under threat.
The government’s December update acknowledged “elevated geopolitical tensions” as a primary risk. It noted that escalation in Middle East conflict could disrupt global shipping and energy markets, forcing the RBA to maintain a restrictive stance. Treasury modelling warned that a slump in global growth and weak domestic confidence would gut the state’s budget, wiping nearly $1.9 billion off the bottom line over the next two years and forcing the state to take on an extra $1.94 billion in debt by 2027.
Opposition Leader and shadow treasurer Jess Wilson said the government had become increasingly reliant on new and increased property taxes to pay for their “financial mismanagement”.
“With interest repayments soon to reach $1 million an hour, the potential multibillion-dollar budget hit caused by moderating property prices will only mean higher taxes or poorer services elsewhere,” she said.
Hayward said the government had failed to exercise the fiscal restraint necessary to shield the budget from global instability. “Every bit of extra revenue the government has received, they have taken it and spent it,” he said, citing the free public transport scheme as an example of policy without “distributional analysis”.
“There are some pretty nicely paid businesspeople in the city who are doing pretty well from travelling for free from their middle-suburb houses,” he said.
Property Council Victoria executive director Cath Evans said any downturn in prices, transactions or investor activity creates a real risk of a revenue shortfall for the government.
“With the cost of delivering new homes increasing substantially, subdued price growth also impacts the feasibility of new housing projects. This is especially true in established areas where the government wants to see more new homes get built,” she said.
Start the day with a summary of the day’s most important and interesting stories, analysis and insights. Sign up for our Morning Edition newsletter.
