Buyer competition was intense earlier this year but it has moderated in recent weeks and the softer conditions are expected to carry into next year. Picture: Tim Hunter.
Growth in Sydney home prices is expected to slow next year as the prospect of interest rate hikes, rising unemployment and more housing supply put a brake on the market.
A new report from PropTrack showed more modest growth was expected compared to 2025, with Sydney dwelling prices forecast to grow 5-7 per cent over 2026.
This would mean the median dwelling price, based on sales of units, townhouses and houses, would rise at least $62,000 from about $1.23m currently to over $1.3m by the end of 2026.
“In Sydney, 2026 is likely to be a year of more modest gains relative to 2025, with price growth no longer accelerating,” PropTrack’s Property Outlook report said.
Prices in Sydney rose an average of 7 per cent over 2025, according to PropTrack, but most of that growth came over only a few frenzied months in the middle of the year.
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This period occurred after the second of three rate cuts was announced in May, which launched a scramble for cheaper houses across middle- and outer-ring suburbs.
There was also considerable growth following the closely timed third RBA cash rate cut in August and the government’s expansion of the First Home Guarantee Scheme in October.
Growth in prices for detached houses was particularly strong, with prices for freestanding houses rising about $120,000 over the year.
Sydney’s housing market has cooled since spring, with revelations of higher than expected inflation in November pouring cold water over previous expectations of further interest rate cuts early next year.
Some of Australia’s big four banks now expect rate hikes next year: CBA has forecast a hike in February, while NAB is expecting hikes in February and May. ANZ and Westpac said they expected rates would be on hold for the foreseeable future.
“With interest rates expected to remain on pause, the scope for further expansion in borrowing capacity is limited and affordability constraints will be a headwind for growth,” the outlook report said.
“More affordable outer and middle ring suburbs are likely to attract the bulk of demand.”
Auctioneer Clarence White, director of auction house Menck and White, said buyer confidence has shifted dramatically in the closing weeks of 2025.
Houses with scope for development like this one in Castle Hill continue to sell well. The house sold for $2.4m, $300,000 over reserve.
He said buyers had more choice of listings than earlier in the year and the “FOMO”, or fear of missing out, that once governed buyer decisions earlier this year had “vanished”.
“We find it’s especially difficult in the market above $2m,” he said. “These buyers have to borrow a lot more, so they are more hesitant.
“Under $1.5m, where you get the (First Home Guarantee Scheme), still does well.”
REA Group economist Anne Flaherty said the guarantee scheme could keep sections of the market ticking along.
“Even without further interest rate cuts in 2026, home values in Sydney are still expected to grow off the back of structural supply shortages and population growth,” she said.
“Areas where home prices are under $1.5 million are expected to see the strongest growth due to the Australian Government 5 per cent Deposit Scheme which is likely to drive a surge in first home buyer demand.”
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Auction clearance rates have dropped to about 56 per cent over the past two weeks, down from about 70 per cent in the winter months.
Cooley director Michael Garofolo, who calls a lot of the auctions in Western Sydney, said some buyers were retreating from the market after a year of brutal competition and may reappear next year.
These buyers may have more choice than in 2025, with a range of new homes likely to be listed in February, but the market would still be “fairly strong”, Mr Garofolo said.
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