Australian house prices set for downturn as rate hikes bite

Australia's housing market is teetering on the edge of a significant downturn as the pressures of soaring interest rates and stretched affordability finally begin to erode buyer demand. 

Following a sustained period of extraordinary growth that has bolstered household wealth across the country, new data suggests the tide is now turning, with the nation's largest capital cities already in the early stages of retreat.

The shift in market sentiment follows a grim Tuesday for mortgage holders, as the Reserve Bank of Australia (RBA) delivered its third interest rate hike of the year. 

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The 25-basis-point increase lifted the official cash rate to 4.25 per cent, effectively clawing back the relief Australians enjoyed from last year's rate cuts. 

And experts have warned the pain is likely to continue.

Bendigo Bank head of economic research David Robertson yesterday suggested that the volatility stemming from the Middle East conflict is making further hikes all but inevitable. 

Analysis from data provider Cotality, released today, confirms that the market is now reacting to this tightening cycle. 

Cotality Research Director Tim Lawless noted that while Australia's combined capital city markets have navigated ten distinct downturns over the last four decades, the current softening is being driven by a combination of rising borrowing costs and waning consumer confidence. 

"Sydney and Melbourne are already five months into the early phases of decline, while growth is slowing across the mid-sized capitals," Lawless said.

"Listings are picking up as demand softens, interest rates are rising while affordability and serviceability pressures are biting."

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Capital city home values grew by a negligible 0.2 per cent in April, a figure that is expected to dip into negative territory in the coming months. 

Some, but not all, of the weakness could be attributed to interest rate hikes, Lawless said.

"The market was already slowing well before the hiking cycle commenced, highlighting the downside impact of waning confidence from late last year alongside rising inflation and worsening levels of housing affordability."

Despite the looming correction, the majority of Australian homeowners remain in a solid position thanks to the substantial amount of equity they have built up over the past five years of rising house prices, Cotality wrote.

The combined capitals index has surged more than 33 per cent in that period, with cities like Perth, Brisbane, and Adelaide all seeing astronomical growth of between 80 and 90 per cent. 

At the start of the year, the RBA estimated that fewer than one per cent of households were in negative equity.

However, the outlook is more precarious for buyers who have entered the market recently.

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Those who purchased properties with small deposits, including participants in the federal government's five per cent deposit scheme, face a higher risk of seeing their debt exceed their home's value. 

"Recent buyers are arguably at more risk of seeing negative equity, given they have had less time to accrue value in their property or pay down the principal of their loan," Lawless said.

"However, mortgage repayments are typically prioritised, with borrowers more likely to adjust spending elsewhere before missing a payment."

There are some signs that cracks are starting to appear in the finances of mortgage holders.

Earlier this week, the National Debt Helpline (NDH) reported there has been a surge in calls since the start of the year, with mortgage stress remaining the top reason for getting in touch.

Just under 14,000 people called the NDH in April 2026, a 21 per cent increase on the year prior.

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Economists expect mortgage arrears to remain relatively low for the time being, supported by a tight labour market and the three per cent serviceability buffer required by lenders. 

While there hasn't been a massive surge in distressed selling yet, the number of properties on the market is rising because buyers are becoming more cautious. 

In the four weeks leading into early May, more than 39,000 properties were added to the market nationally, a figure nearly five per cent above the five-year average. 

In Sydney, Melbourne, and Canberra, total advertised stock levels are now at above-average levels, giving remaining buyers more leverage during negotiations.

Reflecting this shift in power, vendor discounting is on the rise. The median discount across combined capital cities has increased to 3.1 per cent as sellers adjust their expectations to meet a more frugal pool of buyers. 

While Sydney and Melbourne values fell by 0.6 per cent in April alone, the national landscape remains fragmented. 

Perth continues to defy the broader trend with a staggering 26 per cent annual growth rate, highlighting a massive 24-percentage-point performance gap between the Western Australian capital and Melbourne.

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