The Easing of the Australian Housing Market: An Overview
The Australian housing market, once marked by rapid growth and escalating prices, is now demonstrating the first significant signs of easing since interest rates began their upward trajectory back in May 2022. Tim Lawless, the research director at Cotality, suggests that this softening may indicate a weaker housing trend as the market heads into 2026. He notes that the renewed speculation surrounding the potential for interest rate hikes from the Reserve Bank of Australia (RBA) has negatively affected housing confidence.
Factors Influencing Market Easing
One prominent factor contributing to the deceleration of the housing market is the current "higher for longer" interest rate environment. This, combined with ongoing cost-of-living pressures and declining housing affordability, seems to have cooled the market significantly. As a result, December recorded the slowest monthly increase in house prices in five months, with a modest rise of only 0.7%. Notably, Sydney and Melbourne experienced a decline of 0.1% in property prices during December, marking their first decrease since January of the previous year. Lawless reflects on this trend, indicating that such negative movements have become increasingly expected as both markets were exhibiting signs of losing momentum towards the end of the year.
Despite the slow end to 2025, Cotality’s Home Value Index (HVI) reported an overall increase of 8.6% for the year, raising the national median dwelling value by approximately $71,400. This gain represents the most substantial annual uptick since 2021 when the market surged by 24.5% against a backdrop of record-low interest rates and robust purchasing activity.
Regional Trends and Demand Factors
Across different Australian cities, changes in property prices reveal a mixed picture. Particularly, Adelaide and Perth have recorded the most notable price increases at 1.9%, followed by Brisbane and Darwin at 1.6% and Hobart at 0.9%. Despite facing affordability issues, certain areas, especially those with housing priced under a million dollars, are showing promising growth thanks to initiatives like the 5% deposit scheme that significantly boosts demand at this price point.
Interestingly, affordable housing pockets are still observed in various locations across Australia. As highlighted by Ray White chief economist Nerida Conisbee, cities like Perth, Adelaide, and Hobart continue to attract attention due to their relatively lower property prices, drawing in buyers who feel priced out of Sydney, where the median house price sits at a prohibitive $1.5 million.
Outlook for 2026
Looking forward to 2026, both Lawless and Conisbee anticipate continued weakness in the property markets of Sydney and Melbourne, although significant downturns are not expected. Lawless points out that demand-side pressures could diminish owing to ongoing affordability constraints and heightened credit regulations, as the banking regulator tightens restrictions on high-risk loans. Current trends suggest that only 20% of new loans may exceed six times a borrower’s annual income, likely constraining the market even further.
A consensus is emerging that the Australian housing market, while experiencing some growth in specific areas, will remain subdued overall in 2026. The course of interest rates will play a critical role in shaping market sentiments and dynamics. As both economists noted, expecting falling interest rates is unrealistic, particularly with the present discussions around more hikes.
Some industry players, such as real estate agent Jordon Le Breux, express a more optimistic view, suggesting that a stable environment could lead to a steady market without significant upward or downward swings. Le Breux emphasizes that as long as interest rates hold steady, major fluctuations in the housing market are not anticipated.
Conclusion
In summary, while the Australian housing market has shown resilience in the past, the current landscape is shaped by rising interest rates, cost pressures, and affordability issues that thwart first-time buyers. Despite an impressive annual increase in 2025, the signs of market cooling are evident, particularly in key metro areas like Sydney and Melbourne. Moving into 2026, the expectation is for a more reserved market influenced heavily by financial conditions and lending regulations, with the potential for regional disparities in growth prospects. The path ahead will be closely watched as the interplay of various economic factors continues to shape Australian housing dynamics.
