Analysts once united on the country’s continued property market growth have split as economic uncertainty grows.
Many experts, including the big four banks, have refined their projections to reflect slowed growth across 2026 and 2027. But others have gone a step further and predicted falling prices in key major cities.
SQM Research has downgraded its 2026 market forecast, which shows Australia’s two most prominent property markets, Sydney and Melbourne, are now officially going backwards.
The dramatic shift marks a significant reversal from the firm’s earlier, more optimistic predictions, painting a significantly bleaker picture for the eastern capitals due to a potent mix of persistent energy shocks, re-accelerating inflation, and the looming threat of further RBA interest rate hikes.
SQM’s dramatic reversal for eastern capitals
Just last December, SQM Research’s original base case scenario tipped national home values to climb a healthy 6 to 10 per cent in 2026, with several capital cities poised for double-digit gains.
Perth, Adelaide, and Brisbane were all forecast for robust growth, and even Sydney and Melbourne were expected to add 3 to 6 per cent and 4 to 7 per cent respectively.
However, under SQM’s updated base case, which factors in the cash rate potentially climbing to 4.35 per cent by mid-2026 and annual CPI inflation peaking at 4.4 per cent to 5.0 per cent, the outlook has drastically changed.
Sydney is now forecast to experience dwelling price losses of -6 per cent to -2 per cent, while Melbourne is projected to follow suit with anticipated falls of -4 per cent to -1 per cent.
This stands in stark contrast to their earlier expected growth, with the broader weighted capital city growth now anticipated to be a modest 0 per cent to 3 per cent.
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Source: SQM Research
Big Banks weigh in: A divided outlook
While SQM Research currently stands alone in predicting significant price falls for Sydney and Melbourne, other major financial institutions are also forecasting a slowdown.
The Commonwealth Bank, in its latest economic update, supported subdued market conditions for these two major cities.
CBA’s modelling suggests that the Reserve Bank’s February rate hike and expected May increase could subtract 1 percentage point from 2026 price growth forecasts and 2 percentage points from 2027.
This impact far exceeds any from potential changes to capital gains tax and negative gearing. The bank noted that without these two rate hikes, house prices could be growing at 5 per cent instead of the forecast 3 per cent in 2027.
2025 dwelling price growth according to PropTrack.
“Brisbane and Perth (are) expected to continue to outperform in the near term, supported by tight demand-supply dynamics and economic momentum, though higher borrowing costs and affordability constraints should see growth slow by 2027,” the CBA report stated.
It tipped Perth to rise 15 per cent this year, with Brisbane to jump 12 per cent, both slowing to 4 per cent in 2027.
In contrast, CBA expects Sydney and Melbourne to experience “more subdued outcomes, largely reflecting higher construction rates relative to population increases in recent years.”
For Sydney, affordability constraints and sensitivity to interest rate hikes are key factors, while Melbourne also faces a less supportive investor tax backdrop.
Source: CBA, ANZ, NAB, Westpac
PropTrack economists are also predicting a slowdown in property price growth due to rising interest rates.
Similarly, ANZ senior economist Madeline Dunk highlighted that while total listings are significantly below normal levels in smaller capital cities like Brisbane, Perth, Darwin, and Adelaide, “new listings are a little higher than usual in Melbourne and Sydney. We expect Melbourne and Sydney to underperform, particularly in the first half of the year, with prices growing less than 3 per cent in 2026.”
Why the shift? Inflation, energy, and rates
The primary culprits behind this significant downgrade, particularly for Sydney and Melbourne, are clear.
Escalating Middle East tensions, pushing Brent crude oil prices above US$92 per barrel with potential to reach US$150, are amplifying cost-of-living pressures across the board.
This “energy price pass-through” could see petrol prices soar to $2.57 per litre, severely eroding household affordability and the capacity of buyers in these already expensive markets.
Compounding these pressures is the expectation of limited wage growth.
SQM Research highlights that the increasing adoption of artificial intelligence is curbing labour demands, preventing the kind of 1970s-style wage-price spirals that might otherwise help households absorb rising costs.
SQM Research director Louis Christopher
While potential government rebates might offer some relief, they are not anticipated to fully revive market momentum, especially in the face of higher borrowing costs.
Louis Christopher, Managing Director of SQM Research, did not mince words regarding the vulnerability of these major markets.
“Our revised forecasts reflect a more cautious outlook as energy-driven inflation risks mount,
potentially delaying rate relief and weighing on housing demand,” he said.
“While resource-heavy markets like Perth and Darwin hold firm, the downgrades in Sydney and Melbourne highlight vulnerability to higher rates.
“If shocks persist, we could see even softer outcomes, though fiscal measures like energy
rebates might provide a buffer. Investors should monitor RBA signals closely amid these
uncertainties.”
Both Sydney and Melbourne are expected to see dwelling price declines throughout 2026.
Regional resilience amid uncertainty
Indeed, while Sydney and Melbourne grapple with “steeper headwinds” from higher borrowing costs and subdued migration, other parts of the country are expected to remain robust.
Perth and Darwin, despite the overall market cooling, still retain strong outlooks of 10 per cent to 13 per cent and 12 per cent to 16 per cent growth respectively, buoyed by strong demand.
Brisbane and Adelaide are also looking at annual house price growths between 7 per cent and 11 per cent.
For homeowners and prospective buyers in Sydney and Melbourne, these revised forecasts signal a period of significant caution and potential contraction, with economic fundamentals now firmly dictating the trajectory of property values in Australia’s largest cities.
SQM Research also modelled alternative scenarios, underscoring the market’s acute sensitivity to monetary policy, with more aggressive RBA actions potentially leading to further market weakening.
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