Australia’s housing market is poised for another surge, with new forecasts tipping record prices across all capital cities by the end of 2026, even as the prudential regulator warns that financial vulnerabilities tied to the property sector are building once again.
The latest projections show Sydney’s median house price could reach $1.9 million by late 2026, fuelled by cheaper mortgage rates, tight supply, rising household incomes and the expanded first home buyer guarantee. At the same time, APRA’s newly released System Risk Outlook shows the regulator is watching a fresh lift in high-risk mortgage lending, increased investor activity and intensifying competition among banks.
For brokers, the combination of accelerating price growth and regulatory caution suggests a market where demand is returning faster than lending standards are likely to loosen.
Forecasts indicate house prices across the combined capitals will rise to a median of about $1.3 million by the end of 2026, an increase of roughly $102,500 from September this year. Units are also expected to climb, gaining around $52,500 to reach a median close to $759,000.
Sydney is projected to lead the next upswing, with house prices rising 7 per cent in 2026. Melbourne follows at 6 per cent, while Brisbane, Perth and Canberra are expected to rise around 5%, and Adelaide 4%. According to Domain’s economist Nicola Powell, Sydney, Melbourne and Brisbane are poised to drive national growth, reversing the recent pattern where Perth and Adelaide led price gains.
The expanded federal first home guarantee is central to these forecasts. With higher price caps and the removal of income thresholds, the scheme is expected to lift prices by 3.5% to 6.6% in its first year. Gains could be even higher if investor participation accelerates in anticipation of long-term price growth.
The new settings also dramatically shorten Sydney’s deposit-saving timeframe, bringing it down from roughly a decade to about three years.
Despite the assistance available to first-time buyers, many recent purchasers remain under financial strain. In Sydney, homeowners purchasing at the median price with a 20% deposit now allocate more than 70% of the average two-person household income to mortgage repayments. That figure stood below 50% in 2019.
Adelaide and Melbourne follow with mortgage burdens exceeding 50% of income, while Brisbane, Perth and Canberra remain below that level. The Reserve Bank considers households spending more than 30% of income on mortgage repayments to be experiencing a high repayment burden.
Powell describes Sydney as the “pinnacle of strained affordability,” noting that many buyers rely heavily on accumulated equity or parental support to enter the market.
APRA’s report highlights several areas of concern as the housing market regains momentum. Household debt remains close to 180% of disposable income — high by both international and historical standards — and APRA notes that this leaves borrowers more vulnerable in the event of an economic downturn.
Lower interest rates have lifted borrowing power, while the expanded first home buyer scheme is expected to lead to more high loan-to-value ratio loans. Investor activity is also rising at its fastest pace in a decade, and APRA has observed that some banks are showing more willingness to approve loans that fall outside their usual credit policies.
Although lending standards remain generally sound, the regulator warns that heightened competition could encourage a softening of underwriting practices. It is already working with lenders to ensure macroprudential tools — such as limits on high–debt-to-income loans or investor lending — can be activated quickly if needed.
For mortgage brokers, the evolving landscape presents a mix of opportunity and risk:
• Demand from first home buyers is likely to rise significantly.
• Investor participation is increasing, potentially boosting activity in the investment segment.
• Stringent serviceability rules remain, and may tighten if APRA decides to intervene.
• High repayment burdens, especially in Sydney, may restrict borrowing capacity for many clients.
The forecasts suggest Melbourne will fully recover by the end of 2026, with its median house price expected to reach roughly $1.18 million. Victoria’s projected population growth is expected to strengthen housing demand in the medium term.
Affordability pressures in Brisbane, Adelaide and Perth are pushing buyers towards units, which are expected to outperform house prices in those capitals.
Commentators say the deposit guarantee will help Sydney renters leave the rental market sooner and benefit earlier from capital gains. The scheme may also reduce the disadvantage faced by buyers without access to parental financial support.
Rawnsley also points to Sydney’s long-standing supply shortages, arguing that chronic underbuilding — rather than demand alone — has played a major role in pushing prices towards the $2 million mark.
APRA judges domestic risks to be less pressing than global ones, but warns that vulnerabilities could deepen if strong demand combines with any deterioration in lending standards. Its concerns extend beyond housing, with the regulator identifying increasing interconnectedness within the financial system — particularly between banks and superannuation funds — as a structural vulnerability that could amplify stress under certain conditions.
While the financial system remains resilient overall, APRA’s message is clear: housing momentum is returning quickly, but so too are the risks that come with it.
