Property price slump creates a billion-dollar problem for the state budget

Plummeting house prices could wipe as much as $1.8 billion from the Victorian budget this year alone as banks and real estate experts predict a downturn worse than Treasury’s forecast in May.

The hit to stamp duty, the state government’s biggest source of tax revenue along with payroll tax, calls into question Labor’s promised $1 billion surplus in a budget already struggling under the weight of a debt bill headed towards $200 billion.

When the government handed down its budget in May, it forecast that prices would increase by 3.9 per cent in the financial year to June 2027.

This represented a slower growth rate compared with previous years, which Treasury expected would pick up later in the decade as interest rates were cut, helping the property market recover out to 2030.

But since these predictions were published, leading forecasters have warned property prices in Melbourne for both homes and apartments are falling by an average of 4 per cent.

Domain’s forecast report for 2026-27 predicts combined dwelling prices will fall by 4.4 per cent, Westpac is expecting a decline of 4 per cent and Commonwealth Bank, the nation’s biggest lender, now expects Melbourne house prices to decline by 10 per cent in 2026 with the fall to continue until April next year.

A decline of 4 per cent would represent an almost 8 per cent difference to the expectations outlined in the May state budget.

More pessimistic forecasts have caused alarm within other east-coast state governments which rely on stamp duty and land tax as key revenue streams and which are managing historically high levels of debt.

The Carroll government declined to say whether they had already downgraded their expected tax take because of the property market slump, or to provide revised figures for 2026-27.

However, Treasury bureaucrats provide their own modelling on the financial consequences if their economic modelling does not unfold as planned, in a section of the budget papers known as the sensitivity analysis.

In May, this predicted that if the property market performed 1 percentage point lower than forecasts, the government would lose $228 million in revenue.

An 8 per cent shortfall in forecasts would theoretically equate to a revenue hit of up to $1.8 billion this financial year.

Any significant downturn in sales volumes, which are expected alongside price decreases, would also cost $100 million of revenue for every 1 percentage point below expectations, the analysis found.

A government spokesperson argued the budget had accounted for shifts in the property market.