Higher rates and lower confidence reduce house price forecasts

Widespread falls in housing prices are still “unlikely”, given the structural tightness of the market, the duo said, but higher interest rates and building costs are likely to negatively impact supply, while population growth is expected to remain solid.

According to the economists, Sydney and Melbourne markets are already “showing signs of slowing” and are expected to “underperform in 2026”.

Meanwhile, the smaller capitals – which have been growing strongly in the past years (Western Australia and Queensland home values have doubled over the past five years, according to Cotality data) – are also believed likely to underperform in 2027.

Indeed, the major bank’s economics team believes that house prices will only grow by 2.1 per cent across the capital cities in 2027.

‘Uncertain backdrop and higher rates are likely to soften Australia’s housing market in 2026’

Writing in an Australia Insight report on 9 April, the economists said: “Since the escalation of the Middle East conflict in late February, we have added another 25bp [basis point] hike to our RBA profile and now expect the cash rate to peak at 4.35 per cent in May.

“This would fully reverse the 75bp of cuts seen in 2025 and would leave rates in what we view as restrictive territory.

“Confidence has fallen sharply in recent weeks, with ANZ-Roy Morgan Australian Consumer Confidence near a record low.

“The uncertain backdrop and higher rates are likely to soften Australia’s housing market in 2026, so we now expect capital city housing prices to lift 2.8 per cent…”

The update revealed that there are already signs of softening demand for home buying – with auction clearance rates slowing in recent weeks – and follows a soft end to 2025, as expectations around the direction of interest rates shifted.

Preliminary clearance rate data from property analytics company Cotality has revealed that the early auction clearance rate has been below the 60 per cent mark for the past two weeks (albeit the Easter long weekend may have impacted auction activity in the week ending 5 April).

According to ANZ’s economics team, Sydney and Melbourne housing prices are below October 2025 levels, and properties in the top quartile of these markets have declined for five consecutive months. Given these two markets are the most expensive Australian capital cities to buy in, they tend to be more rate-sensitive.

ANZ now expects Sydney house prices to fall by 0.7 per cent this year and grow by 2.6 per cent next year. The last time Sydney house prices dropped was in 2022; however, this was largely due to the 27.7 per cent increase in prices during the peak home-buying boom of 2021.

For Melbourne, ANZ expects house prices to fall by 1.7 per cent this year, before growing by 2.9 per cent in 2027.

“We also expect Brisbane, Perth, Adelaide and Darwin to slow, but this is likely to be more pronounced in late 2026 and early 2027,” the economics team continued.

“Listings are currently very low in these markets... and price growth has remained robust in early 2026.

“As the year progresses, higher rates, slowing activity and affordability constraints are likely to slow price growth. We expect Adelaide, Brisbane and Perth to underperform in 2027.”

The forecasts outline that the smaller capitals will see house prices change as follows:

• Brisbane – up 9.7 per cent in 2026, up 1.4 per cent in 2027.

• Adelaide – up 5.7 per cent in 2026, up 0.2 per cent in 2027.

• Perth – up 12.3 per cent in 2026, up 1.5 per cent in 2027.

• Hobart – up 3.7 per cent in 2026, up 0.6 per cent in 2027.

• Canberra – up 1.6 per cent in 2026, up 0.5 per cent in 2027.

• Darwin – up 8.0 per cent in 2026, up 2.6 per cent in 2027.

While ANZ has softened its house price growth trajectory as a result of falling demand, it has flagged that any changes to housing taxes, such as a potential reduction in the capital gains tax (CGT) or limits to negative gearing, could change these forecasts.

“Given this policy uncertainty, we have not explicitly included tax changes in our housing price forecasts but rather acknowledge them as a source of risk,” the ANZ economics team said.

[Related: HIA warns tax reform could derail housing supply goals]