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Housing Market Loses Steam for 2026 as Rate Hike Fears Clash with Australia’s Deep Housing Shortage
Australia’s housing market is expected to enter 2026 on a weaker footing as fears of another interest rate hike hit buyer confidence, but a deep shortage of homes is still likely to keep prices and rents edging higher rather than falling.
Key national trends
- Cotality’s national Home Value Index rose 0.7 per cent in December, the smallest monthly gain in five months and a clear sign that momentum is fading after a strong 2025.
- The index still finished 2025 up 8.6 per cent, adding about $71,400 to the national median dwelling value and marking the strongest calendar-year gain since the pandemic-era boom of 2021.
Capital cities versus regions
- Sydney and Melbourne slipped 0.1 per cent in December, their first month-on-month declines since January 2025, while every other capital city and rest-of-state region still recorded gains, albeit at a slower pace.
- Across 2025, Darwin led the capital-city pack with dwelling values up 18.9 per cent, while Melbourne recorded the softest annual gain at 4.8 per cent; regional markets overall rose 9.7 per cent, outpacing the combined capital cities’ 8.2 per cent.
Rates, confidence and supply
- Cotality research director Tim Lawless says high inflation and a “hawkish” Reserve Bank stance have delivered “a substantial dent in confidence”, with markets now pricing in the risk that the next move in rates is a hike rather than a cut.
- Despite softer momentum, analysts warn that rising construction costs, labour shortages and development-feasibility issues mean housing supply will stay “well below what the country requires”, keeping upward pressure on prices even as demand cools.
Rental market pressures
- National rents rose 5.2 per cent in 2025, with regional Western Australia posting the biggest jump at 10.1 per cent and Darwin up 8.2 per cent, while Melbourne had the smallest increase at 2.9 per cent.
- Vacancy rates have edged slightly higher, giving renters brief relief, but remain well below levels consistent with a balanced market, meaning further rental increases are likely through 2026.
Outlook for 2026
- Market forecasters expect Australian home-price growth to slow from about 8–9 per cent in 2025 to closer to the mid-single digits in 2026 as affordability constraints, tighter credit conditions and the risk of a rate hike cap buyer demand.
At the same time, population growth, normalising but still-solid migration, and entrenched supply shortages mean a broad-based price correction remains unlikely, leaving buyers and renters facing another challenging year for affordability rather than a sharp downturn in values.
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