Housing Market Entering “New Phase” With Strongest House Price Growth Forecast In Sydney

The Australian housing market is entering a “new phase” with support for first-time buyers, lowered interest rates, modest real income growth and affordability ceilings slowing price growth, a forecast for 2026 has found.

Domain predicts that, following “years of affordability strain and tight supply, 2026 is expected to deliver a more balanced, policy-driven cycle” supported by greater confidence and easing financial conditions.

“Sydney is forecast to record the strongest house price growth, consistent with its tendency to lead the market in response to changes in interest rates,” the report from the property industry business stated.

House rent growth in Sydney is expected to increase, “reflecting rising household incomes and still-tight rental supply.” Unit rents in the city are also expected to rise, slowing down during the second half of the year.

In all, the first half of 2026 should see greater momentum in both house prices and demand. The second half should be characterised by slowing growth due to affordability pressures, particularly in cities such as Sydney which have seen surging prices.

Expansion of First Home Buyer scheme to make homes more accessible

“Price growth across all capitals will be underpinned by the expansion of the First Home Guarantee Scheme, which enables buyers to purchase with a five percent deposit and no lenders’ mortgage insurance – removing key barriers to home ownership.”

The scheme was expanded in October by removing income caps, removing the limit on annual places and lifting property price caps – which in Sydney have risen from $900,000 to $1.5 million.

It is predicted that the expanded scheme could lift home prices by 3.5 percent to 6.6 percent in its first year, “largely reflecting a pull-forward of around 20,000 first-home buyers.”

Removing lenders’ mortgage insurance “reduces the incentive for buyers to save a larger deposit and delivers an immediate boost to purchasing power, which enables buyers to stretch further in price negotiations.”

This inflationary effect is expected to fade beyond next year, as demand normalises. “These estimated impacts seem sensible, though there is a high degree of uncertainty,” the report states.

Analysis by Domain found that the scheme “could cut deposit-saving times dramatically,” from more than 10 years to around three for Sydneysiders aspiring to own a home.

Future interest rates uncertain

Dr Song Shi is an Associate Professor of Property Economics at the University of Technology’s School of Built Environment. He emphasised the “close relationship” between interest rates and the price of housing, noting that “in general, when the interest rate is going down, the housing price will be going up.”

He cautioned against making assumptions about interest rates next year or future house prices.

Shi added that the Five Percent Deposit Scheme – formerly called the Home Guarantee Scheme – shifts risk from banks to buyers.

“A five percent deposit in any commercial loan is risky. If the house price dips more than five percent, then all your equity is gone.”

He advised those considering the purchase of their first home to ask “whether this is a good investment or not, to buy into the housing market at the moment.”

Housing institute stresses design of equity schemes

Recent research by the Australian Housing and Urban Research Institute found that shared equity schemes are less effective in more expensive cities.

“Many schemes underestimate affordability challenges for homebuyers in major capital cities. This suggests the schemes are less effective at supporting aspiring homebuyers in larger cities.”

Despite the Albanese Government’s recent expansion of the programme, the institute found that schemes with more stringent criteria “better target customers who would otherwise be unable to buy a home.”

Whether these findings will be borne out in Sydney following the Commonwealth reforms remains to be seen.