Interest rate rises and tax changes that spooked investors are expected to push down home prices this year, offering buyers a window of opportunity to get in before growth resumes.
Home prices are expected to decline throughout 2026 in Australia’s largest cities, according to a new forecast revealing the impact that rate hikes and higher property taxes are expected to have on the property market.
A reduction in investor demand is tipped to combine with affordability challenges and back-to-back interest rate rises to push prices lower in some markets, according to the latest realestate.com.au Property Market Outlook, released today.
Prices are expected to fall this year in Australia's two largest cities following interest rate rises and tax changes for property investors. Picture: Getty
Sydney and Melbourne are expected to feel the brunt of the slowdown, according to the report, with values on track to decline by 3% and 4% respectively throughout 2026.
But the downturn won’t last long, with population growth, housing supply challenges and strong first-home buyer demand putting a floor under home prices and growth resuming later this year.
Prices are expected to keep rising in 2027, although values will rise slower than what is typical.
Source: realestate.com.au Property Market Outlook - June 2026
While Brisbane, Perth and Adelaide are also facing a slowdown, prices in these cities are still expected to be higher at the end of 2026 than at the start, but growth in future years will slow.
Report author and REA Group executive manager of economics Angus Moore said this year’s interest rate rises and property tax changes were already having an effect on the housing market.
“Home price growth has clearly slowed, and market conditions cooled, following the three consecutive rate hikes from the RBA,” he said.
“The changes in the Federal Budget, and the consequent reduction in investor demand, will weigh on growth in 2026 and 2027.”
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Under changes announced in the budget, negative gearing will be restricted to newly built homes and the 50% capital gains discount will be replaced with an inflation-indexation model from July next year in a move that the federal government hopes will boost housing supply and help young people get into the housing market.
“While estimates suggest the effect on home prices from these changes will probably be modest in the long run, the short-run effect is to reduce price growth by a couple percentage points in 2026 and 2027,” Mr Moore said.
An unintended side effect of taxation changes could also incentivise homeowners to hold onto their properties for longer, rather than 'right-size' their home.
Window of opportunity
The combination of rate hikes and tax changes could create a brief window of opportunity this year for Sydney buyers to purchase in a less competitive environment, given home prices in the nation’s most expensive city have risen every calendar year since 2022.
Mr Moore said buyers in both Sydney and Melbourne had more homes to choose from this year.
“New listings over the first five months of 2026 were up 6-7% annually in both cities, which has given buyers more choice,” he said.
Source: realestate.com.au Property Market Outlook - June 2026
While Melbourne prices are tipped to fall a little more than in Sydney, its rebound will be stronger owing to higher population growth helping to absorb the increased supply of homes.
“Victoria is forecast to add over one million more people to its population over the coming decade, which is likely to outpace new housing construction,” Mr Moore said.
Price growth to normalise in booming cities
Meanwhile, the rapid rates of price growth experienced in Perth, Brisbane and Adelaide are expected to come to an end, with growth returning to a more steady pace over the next two years.
Prices in Perth have increased by more than 20% in the past 12 months, although the slowdown in growth means the city is expected to finish the year with values 8% higher than at the start, with 7% growth forecast for 2027.
Perth has had the nation's strongest capital city housing market for several years, but conditions are already starting to cool. Picture: realestate.com.au/sold
Mr Moore said Perth’s price movements may depend on mining activity and population growth.
“If commodity prices remain elevated, driving up household wages and supporting population growth, this will support home prices, as will the relative low level of new residential construction,” he said.
Values in Brisbane and Adelaide are expected to rise by 5% this year as affordability deteriorates following this year’s rate rise, and another hike expected later this year.
Prices in Hobart have rebounded and growth is expected to continue in the coming years. Picture: realestate.com.au/sold
In Hobart, where values hit a record high this year after an extended downturn, a supply crunch could cause above-average price growth, despite Tasmania’s slower population growth.
“The state is expected to have a strong pipeline of capital works beginning, which, combined with recent interest rate hikes, may soften residential construction and dwelling supply,” Mr Moore said.
Big banks predict sharper downturn
Updated forecasts from the big banks paint a gloomier picture for the housing market, with NAB now tipping falls of 6-7% in Sydney and Melbourne.
Even bigger declines are forecast by ANZ, with falls of about 8% in the two largest capitals predicted for this year, followed by another 2-3% decline next year.
ANZ economist Madeline Dunk said tax changes had caused additional weakness following softer sentiment driven by rate rises, but the effects of the new policies would be more nuanced.
“The downturn will not be evenly felt across the market,” she said. “We expect that properties which are typically more attractive to investors, such as one- and two-bedroom apartments, are likely to underperform given the taxation changes impacting investment.”
“In contrast, houses in areas with large shares of owner-occupiers seeking a principal place of residence should be more resilient.”
The bank expects Adelaide to fare the worst next year, with a decline of 6.4% forecast.
“Unlike Perth and Brisbane, Adelaide’s growth has not been driven by strong population growth, and the market is looking increasingly unaffordable,” Ms Dunk said.
Growth will rebound in 2028, according to ANZ, with values rising 3.8% at the national level and slightly faster in Sydney and Melbourne.
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