Where home prices could take off or crash land in 2026

History shows that betting against the Australian property market is a bold move.

But a dramatic reversal in interest rate expectations means 2026 will be a bit softer for real estate.

Opposing forces should see prices continue to break records this year, but experts are forecasting softer growth than the 8.6 percent reported by Cotality in 2025.

Tim Lawless, director of research at the data center, thinks a rate of five percent or lower nationally is now a reasonable estimate, as high value-to-income ratios and higher mortgage rates constrain demand over the long term.

However, changing housing dynamics will lead to a “performance fabric” overall.

“We will still see the bottom quartile of the market outperform, given that high household debt levels, service barriers and credit constraints will continue to drive mainstream demand towards these lower price points,” Mr Lawless told AAP.

The federal government’s anticipated first home buyer deposit guarantee has further fueled growth in low-value properties below the scheme’s eligibility limit.

Buyer’s agent Pete Wargent at Allen Wargent Property Buyers says the tight rent outlook is also encouraging first home buyers to jump into the property market as soon as possible.

Mid-tier hubs Adelaide, Perth and Brisbane have outperformed the traditional hotspots of Sydney and Melbourne in recent years.

Mr Lawless says the landscape varies from city to city, but Adelaide may be most at risk of correction, given housing value-to-income ratios are close to surpassing Sydney.

“Adelaide is probably at higher risk of a correction than either Brisbane or Perth because it doesn’t have the same fundamentals as those two cities,” he explains.

“It doesn’t have such a diverse economy, interstate migration is currently negative, whereas there are still very strong interstate migration rates in WA and Queensland, which is supporting demand.”

Mr Wargent also calculates that some parts of the country are vulnerable to correction.

He says buyers, pushed out of inner-city areas by affordability restrictions, are flocking to cheaper, more illiquid regional markets.

“This has happened to some extent in Darwin, with buyers’ agents pushing hundreds of customers into the cheapest capital market, increasing prices,” he says.

“This may cause investors to experience short-term price increases, but it is a risky strategy unless you are one of the first buyers in the cycle.

“Some investors will get burned when the tide goes out.”

Value is becoming harder to find, but Mr Lawless likes Melbourne’s “rough” look.

“You have to think Melbourne has room to move upward,” he says.

With a housing value to income ratio of 7.1, Melbourne is the third most affordable capital city after Canberra and Darwin.

And with a median house value of $827,000, Adelaide is cheaper than Perth, Brisbane, Sydney and Canberra.

But Mr Lawless says while there’s a lot going on from an affordability perspective, Melbourne still doesn’t attract large amounts of interstate migration given Victoria’s weak economy.

Price growth in Sydney slowed towards the end of 2025, with values ​​falling 0.1 per cent in December.

But all eyes will be on Australia’s glamorous market to see if more records will fall this year.

Mr Wargent believes it is only a matter of time before last year’s $141.5 million sales record for a penthouse flat atop One Sydney Harbor in Barangaroo is broken again.

Sydney’s eastern suburbs (for houses) and the CBD (for penthouses) are prime candidates.

“Some other cities are driving capital away (like London with its proposed mansion tax),” he says.

“So as long as Australia remains open to capital inflows, real estate will continue to be a storehouse of wealth for the ultra-rich and tech entrepreneurs.”

The NSW government is pushing to increase housing density in a bid to keep supply up to demand and will begin to see more apartment construction over the next few years.

But Mr Lawless says feasibility remains the biggest hurdle for developers to bring more supply to market.

“You can make the approval process as easy as you want, but the private sector can’t build anything if it can’t bring stock to market at a profit,” he says.

A number of factors will keep upward pressure on prices, according to AMP chief economist Shane Oliver.

Among them, he cites three interest rate cuts in 2025, government programs boosting demand, rising consumer confidence and the fallout from the ongoing housing shortage.

But he said the potential for rate rises in 2026, as well as efforts by banking regulator APRA to tighten controls on riskier forms of lending, should ease some of the tension in the market.

Population growth may also slow; The figures released on Friday point to an expectation that net overseas migration will slow before falling further in 2025-26.

Population Center data shows population growth of 1.3 percent falling to 1.2 percent from 2027, which is lower than the 1.4 percent average experienced in the 2010s.

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