Sydney and Melbourne Tipped to Lead Australian House Price Declines as Market Cools

Domain forecasts indicate that house prices in Sydney and Melbourne could see substantial declines over the next year, with potential drops of up to 7 and 8 per cent respectively. This cooling trend is driven by the cumulative impact of interest rate hikes and structural tax policy changes that have constrained borrowing capacity and buyer demand. While some capital cities face downward pressure, the broader real estate sector is seeing a fragmented market where unit prices are expected to outperform houses due to affordability constraints.

Domain’s latest housing price forecasts suggest a significant shift in Australia’s major property markets, predicting that Sydney house values could fall by as much as $122,000 while Melbourne’s median house price may dip below the $1 million mark. This downward pressure is attributed to a "fragmented and constrained market" resulting from the Reserve Bank of Australia’s interest rate hikes, which currently sit at a peak of 4.35 per cent. Domain chief residential economist Nicola Powell noted that while Sydney, Melbourne, and Canberra are facing declines, other capitals like Brisbane, Adelaide, and Perth are expected to maintain price growth, highlighting a lack of national synchronization in market movements.

The divergence between property types is becoming more pronounced, as units are tipped to outperform houses in the coming financial year. This trend is largely driven by first-home buyers who are pivoting toward more affordable options as interest rate rises have severely limited their purchasing power. Domain's report also highlights that changes to negative gearing and capital gains tax discounts in the federal budget are introducing a structural shift alongside cyclical market cooling. Housing Minister Clare O'Neil described these conditions as a "correction" following years of extraordinary growth, though Dr. Powell argued that a true correction would require price drops exceeding 10 per cent, which is not currently forecast.

Despite the projected downturn in certain regions, existing property owners continue to see significant returns, according to data from research firm Cotality. Their 'Pain and Gain' report found that 96 per cent of residential resales in the first quarter of the year resulted in a nominal profit, with the median gain reaching a record $377,000. However, Cotality head of research Gerard Burg warned that declining home values in the coming months will likely erode the profitability of resales, particularly for those who purchased near the market peak in late 2021 or early 2022. Factors such as high construction costs and a general undersupply of housing are expected to prevent a total market collapse by providing a floor for price declines.