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Australian Housing Market Shows Signs of Broad Cooling Amid Policy Changes and Interest Rate Hikes

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Australia's Housing Market: A Nation in Two Halves

The Australian housing market is exhibiting widespread signs of a slowdown, with falling auction clearance rates, declining property values in major cities, and reduced buyer demand. Multiple factors, including higher interest rates, recent federal budget changes to tax policy on property investments, and broader economic uncertainty, are contributing to this shift.

Data from property analytics firms indicates a clear divergence between the cooling markets of Sydney and Melbourne and the continued, albeit slower, growth in other capital cities.

Market-Wide Indicators of Decline

Several key metrics point to a softening market nationally.

Auction Clearance Rates

Auction clearance rates, a key measure of market health, have fallen to levels not seen since the early stages of the COVID-19 pandemic. According to property data firm Cotality:

  • The weighted average national clearance rate fell to 47% in late June 2025 and to 49.2% in the following week, with final figures expected to be lower.
  • This marks the first time the preliminary national rate has dropped below 50% since April 2020.
  • Sydney's clearance rate dropped to 47.4%, and Melbourne's fell to the low-50% range. Similar declines were recorded in Brisbane, Adelaide, and Canberra.
  • Domain data for the week ending June 27 reported a national preliminary rate of 51%, down from 67% in the same period the year prior.
  • Auction withdrawal rates have risen, with 21.5% to 24% of scheduled auctions being withdrawn nationally.

"The weighted average national clearance rate fell to 47% in late June 2025 — the first time below 50% since April 2020."

Property Values

Home values in Sydney and Melbourne have entered a decline, while growth in other capitals is decelerating.

  • Sydney: Dwelling values fell 0.6% in April 2025 and 0.9% in May 2024, and are 2.1% below their November 2025 peak. Suburbs with the largest value declines year-to-date include Malabar (-12.3%), Chifley (-9.9%), and South Coogee (-9.7%).
  • Melbourne: Values declined 0.6% in April and sit 2.3% below their March 2022 high.
  • Other Capitals: Perth values rose 26.0% over the past year, and Brisbane and Adelaide recorded 80-90% growth over five years. However, recent data shows growth slowing: Adelaide home values rose only 0.3% and Brisbane rose 0.5% in the four weeks to late June. Perth's growth of 0.9% is less than a third of the rate at the end of 2023.
  • The combined capital cities Home Value Index is fading, rising only 0.2% in April.

Sales Volumes and Buyer Activity

Transaction volumes and buyer engagement have also declined.

  • Capital city sales volumes in May 2026 were 27,342, a 17% decrease from the 32,863 recorded in May 2025.
  • Open-home attendance fell to an average of 2.1 attendees per property nationally, down from 3.5 a year earlier.
  • Days on market have increased. In Sydney, they rose from approximately 28 days before the May 2024 federal budget to about 40 days after.

Causal Factors

Analysts and economists point to three simultaneous "shocks" affecting the market.

1. Higher Interest Rates

The Reserve Bank of Australia (RBA) has raised interest rates multiple times. These increases have reduced the borrowing capacity for potential home buyers by tens of thousands of dollars for average income earners. The RBA left the cash rate unchanged at 4.35% at its June 2025 meeting, while Governor Michele Bullock stated that further rate rises remain possible.

2. Federal Budget Tax Changes

The May 2025 federal budget proposed changes to property taxation that have dampened investor sentiment.

  • Negative gearing on residential property will be restricted to new builds.
  • A minimum 30% tax on capital gains will be introduced from July 2027, replacing the current 50% discount with an inflation-based system.
  • Westpac analysts forecast a 34% decline in new investor activity and a 20% drop in real estate transaction volumes. Cotality research director Tim Lawless stated the budget impact would likely result in a "fairly sharp pullback in investment activity."
  • Government estimates suggest the tax changes will reduce price growth by about 2% over the next couple of years compared to no changes.

Westpac analysts forecast a 34% decline in new investor activity and a 20% drop in real estate transaction volumes.

3. Economic and Geopolitical Uncertainty

Broader concerns about the economy, rising inflation, and geopolitical tensions have led to reduced consumer confidence and a more cautious approach to major financial decisions, with buyers delaying purchases.

Government Policy Impact: The Home Guarantee Scheme

The expansion of the Australian Government’s Home Guarantee Scheme (5% deposit scheme), which took effect on October 1, 2023, has shown a measurable impact on the market's lower-priced segment.

Uptake

In the first four months following the expansion, 22,921 guarantees were issued, a 75% increase compared to the previous four-month period. This followed the removal of caps on property prices, scheme places, and income limits. Data indicates that nearly two-thirds of the guarantees supported the purchase of houses, and under-30s constituted two-fifths of beneficiaries.

Market Impact

Cotality analysis found that homes eligible under the scheme's price caps appreciated 6.7% in the first six months after the changes, compared to 3.6% for homes above the caps. In Sydney, homes below the price cap rose 4.1% over six months, while higher-priced properties fell 1.1%.

Expert Views

  • Tim Lawless (Cotality): Stated the scheme likely temporarily lifted home ownership rates but "works the opposite" to improving housing affordability by boosting demand without addressing supply.
  • Diana Mousina (AMP): Expressed concern that the scheme might primarily benefit those with access to family financial support rather than those most in need. She identified supply issues as the primary driver of housing unaffordability.
  • Saul Eslake (Independent Economist): Noted that governments have historically responded to price declines by introducing measures to stop falls.
  • Government Spokesperson (Minister Clare O'Neil): Said the government makes "no apologies for helping hundreds of thousands of first home buyers while we fix a supply problem generations in the making," adding that without the scheme, many first home buyers would not be able to enter the market.

Risk of Negative Equity

Concerns have been raised that recent buyers with small deposits, including participants of the scheme, may be exposed to negative equity if property values continue to fall. Cotality head of research Gerard Burg stated that a large-scale crisis is unlikely, as negative equity is only a significant problem for those forced to sell.

Data from Cotality suggests that price falls have been concentrated in higher-priced properties, not in the cheaper segments where first-time buyers typically purchase, though he noted that some purchasers near the $1.5 million Sydney price cap could be at risk. Independent economist Saul Eslake noted that negative equity is only a problem for those who need to sell in the short term.

Expert Forecasts

Analysts and economists have provided a range of forecasts for the coming year. A crash is not widely predicted, largely due to ongoing housing supply shortages and strong net migration.

Price Forecasts

  • Sydney: Domain forecasts a decline of 3-7% by 2027. SQM Research economist Louis Christopher predicts a fall of up to 9% in 2026.
  • Melbourne: Domain forecasts a decline of 4-8% by 2027. SQM Research predicts a fall of up to 7% in 2026.
  • Canberra: Domain forecasts a decline of 0-4% by 2027.
  • Brisbane, Adelaide, Perth: Domain forecasts growth of 3-7%, 4-8%, and 5-9% respectively by 2027.
  • National: AMP chief economist Shane Oliver expects national home price growth to slow to around 3% this year and could turn negative. AMP deputy chief economist Diana Mousina forecasts a drop of approximately 5%. Cotality’s Tim Lawless said it would not be unusual for national values to shrink 8-10%.

Cotality’s Tim Lawless said it would "not be unusual" for national values to shrink 8-10%.

Transaction and Activity Forecasts

  • Westpac analysts forecast a 20% fall in real estate transaction volumes in 2026.
  • A 34% decline in new investor activity is forecast.
  • Investor mortgage applications were down 23% and first-home buyer applications down 12% in recent data.

Regional Variations

The slowdown is not uniform across the country.

  • Sydney and Melbourne: These cities are in the most advanced stages of a downturn, with values falling and clearance rates at multi-year lows.
  • Perth: Continues to show strong growth, with values rising 26% over the past year, though recent growth has slowed significantly.
  • Brisbane and Adelaide: Have recorded strong growth over five years, but recent monthly data indicates a sharp deceleration.
  • Top-End Market: Price falls have been most pronounced in expensive suburbs, which are not typical areas for first-time buyers. In the three months to May, the cheapest dwelling values in Sydney and Melbourne performed better than middle-market and upper-quartile segments.

Statements from Market Participants

Meg Girdler (Sydney Homebuyer): Purchased an apartment in Marrickville near the market peak and expressed concern about losing value and facing negative equity. She welcomed government efforts to "push out investors."

Tina O'Connor (Ray White Agent): Reported a "softening" in home prices, particularly in higher price brackets.

Andrew Valciukas (First National Agent): Described the sentiment change after the budget as "the fastest change in market sentiment" since the COVID pandemic.

Stephanie (Seller and Buyer): Expressed frustration with the market's confusion and felt "nervous both as a seller and buyer."

Joshua Goodfellow (Aspiring Investor): Has paused his home search due to economic uncertainty and policy changes.