S&P Forecasts 5% Australian Property Price Drop by Year-End

Australia’s housing market continues to face strong headwinds from higher interest rates, weaker investor sentiment and major changes to property taxation introduced in the May 2026 Federal Budget.

The Reserve Bank has acknowledged that established housing conditions have softened more than previously expected, with Sydney and Melbourne among the weakest markets. It has also noted that recent tax changes affecting property investors are likely to have contributed to weaker housing sentiment.

The Budget changes include restrictions on negative gearing for established residential property and changes to capital gains tax treatment. Several major economic forecasters have estimated that these reforms could reduce property values by around 3% to 5% over time, particularly when combined with higher mortgage rates.

That pressure is already visible in market forecasts. KPMG expects Melbourne house prices to fall about 5% through 2026, while Sydney is forecast to decline 4.4%.

For Melbourne’s western growth corridor, this environment could mean continued price weakness in the near term, particularly where buyers are operating with reduced borrowing capacity and investors are reassessing expected returns.

For buyers with secure finance, softer values may create opportunities to negotiate on homes that remain on the market longer. However, cheaper property prices do not necessarily mean improved affordability when mortgage rates remain elevated.

Investors face a similar trade-off. Lower purchase prices may improve entry yields, but higher finance costs and changes to tax treatment can reduce the overall attractiveness of some established-property investments.

This may encourage more investors to focus on new housing, where tax settings remain more supportive and where demand is linked to population growth and new infrastructure.

For existing homeowners, the main challenge is the combination of softer property values and higher repayments. Owners who bought recently with smaller deposits may have less equity protection if prices decline further.

The broader outlook therefore remains mixed. Lower values may create better buying conditions for some households, while higher rates continue to limit borrowing power and investment returns.

For Melbourne’s west, the strongest opportunities are likely to remain in areas with solid rental demand, improving infrastructure, employment access and sustainable long-term population growth.

Overall, the current market is being shaped by both monetary policy and tax reform. Buyers and investors should expect a more selective environment where finance, cash flow and local fundamentals matter more than relying on rapid capital growth.