Australia’s housing market is poised for another year of gains, with economists expecting prices to keep rising despite the prospect of higher interest rates and ongoing cost-of-living pressures.
Data from property consultant Cotality, formerly CoreLogic, show home values jumped 8.6% in 2025 – the strongest annual growth since 2021. Economists surveyed by The Australian Financial Review tip another 6% rise in 2026.
“House prices will continue to rise owing to shortages and a growing population,” Craig Emerson, a former Labor minister now at Emerson Economics, told AFR.
Population growth of more than 400,000 people a year has collided with sluggish new construction, leaving Australia chronically short of housing.
Economists warn that government measures meant to improve affordability – including the expanded 5% deposit schemeand the Help to Buy shared equity program – are instead fuelling demand in an already tight market by injecting thousands of extra buyers and doing little to lift supply.
Robert Thompson, a rates strategist at RBC, said that even as regulators push banks to curb “high-risk” large loans, the “migration-driven population growth” remains the dominant force in the market.
“Demand-side pressures have continued to pile up,” Thompson told AFR, pointing to the latest extension of first-home buyer support.
That view is shared by Harry Murphy Cruise of Oxford Economics, who said government support “put a rocket under demand” and warned that the lack of genuinely affordable stock would become the main constraint on the market.
Sydney’s median house price is now nearing $2 million, while the typical home nationally is worth almost eight times average annual income, underscoring the growing affordability divide.
The boom is no longer confined to Sydney and Melbourne. The sharpest gains are now being recorded in once-affordable, mid-sized capital cities.
“We think the mid-sized capital cities continue to outperform in 2026, with supply even tighter than the national average,” said Barrenjoey chief economist Jo Masters.
Perth and Brisbane have become the standout markets, with some analysts forecasting double‑digit growth into 2026.
Judo Bank chief economist Warren Hogan said “the strongest markets will be the growth states of Western Australia and Queensland … the Northern Territory could see a rise by as much as 15%,” signalling what he sees as a major divergence between the growth states and the rest of the country.
Three interest rate cuts in 2025 have already boosted borrowing power and helped propel prices higher.
Bank of America head of Australian economics Nick Stenner remains upbeat, saying: “We expect house prices will increase by around 10% in 2026 as interest rate cuts and government policy boost housing demand.”
Not everyone is convinced the property party can last. Money markets are pricing in around a one‑in‑three chance of an interest rate hike as early as 3 February.
HSBC’s Paul Bloxham expects price growth to slow to between 4% and 7%, while Deutsche Bank chief economist Phil O’Donoghue forecasts an increase of just 3% as tougher lending standards bite.
Former Gillard economic adviser Stephen Koukoulas is even more cautious, predicting a “flat to down” market and flagging a potential 1% decline as unemployment rises and new supply gradually catches up.
At the same time, rate expectations have hardened since many of the original forecasts were made, adding fresh downside risk. Financial markets are now effectively betting on at least one interest rate hike in 2026, rather than further cuts.
In AFR’s latest quarterly poll, almost half of 38 economists now say the next move from the Reserve Bank is up, with several expecting RBA to raise rates at its first policy meeting of the year in early February.
Others argue the structure of Australia’s housing system makes a sustained downturn unlikely while policy remains tilted towards existing owners, who make up about two-thirds of households.
Although the government has pledged to build 1.2 million homes by 2030, economists say planning delays and high construction costs mean little new supply is reaching the market.
“House prices will go up because that’s what they do, almost all the time,” said Saul Eslake, formerly chief economist at ANZ and Bank of America. “And if it ever looks like they might stop, governments will fall all over themselves to prevent that from happening.”
In Eslake’s view, the state will keep “shedding copious amounts of crocodile tears” for would‑be buyers while quietly ensuring the great Australian property machine keeps turning, AFR reported.
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