Australia’s fast-growing housing market finally saw the brakes applied to the rapid expansion of housing sector. The prices of property in Sydney and Melbourne are finally beginning to go backward for the first time in close to two years. While prices throughout the country continue to rise overall, the nation’s largest cities are leading a broader slowdown as people wrestle with increasing mortgage interest rates and a higher cost of living.
Slide Is Led by Sydney and Melbourne
In December, property values in Sydney and Melbourne fell 0.1%. Although this doesn’t sound like much, it’s big news because prices have not fallen in these cities since January of last year. This, experts say, is an indication that the “red-hot” market is finally cooling. Buyers increasingly just cannot afford to pay more, particularly in Sydney where the average house now costs around $1.5 million.
Tim Lawless, a leading researcher at Cotality, said that as the year drew to an end, the market began to “run out of momentum.” He thinks this is not a one-time event, but rather an indication of what’s to come in 2026. With interest rates remaining higher for longer than expected, many have lost the confidence needed to keep bidding prices up. This has “cooled the market” in the priciest areas.
A Good Year Despite the Slump
Despite the soft landing last December, 2025 was a huge year for Australian property. National home values surged 8.6% over the full year. This amounted to some $71,400 added in value for the average home. The housing market had its best year since 2021, when prices soared amid the pandemic.
Nationwide, the picture was mixed:
• Perth and Adelaide were the big winners, with prices rising 1.9 per cent in December alone.
• Brisbane and Darwin also experienced robust growth of 1.6%.
• Canberra and Hobart experienced lower increases, indicating that the slowdown is different for various cities.
A government scheme that allows first-home buyers to purchase a house with only a 5% deposit is part of the reason some markets remained robust, an analyst said. This has helped keep the market humming for homes priced below $1 million, economists say. But for young buyers looking to make a first-time home purchase, it remains “really, really hard” to get a foothold.
What to Expect in 2026
But for the rest of 2026, most experts expect much less action on the market. The large unknown is what will occur with interest rates. If the Reserve Bank pushes rates higher again, that would be expected to put a lid on prices. Alternatively, if rates remain stagnant, it could mean the market simply chugs along and does not take off like last year’s fireworks.
Banks also have new rules coming. It will be more difficult for people to borrow very large sums of money, starting next month. Banks will be restricted in the number of “high-risk” loans they can make to people who are borrowing a lot compared with what they earn. This “tighter credit” is certain to have fewer people who can afford the most expensive homes, which may sustain that much-needed market peace for some time.
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