Property prices in Sydney and Melbourne have fallen sharply, with new data showing Australia’s two largest housing markets are now weighing down national growth as higher interest rates, stretched affordability, and the federal government’s property tax changes unsettle buyers and investors.
Cotality’s latest Home Value Index showed capital city dwelling values were flat through May, but the headline figure masked a widening split between Sydney and Melbourne and stronger markets such as Perth, Brisbane and Adelaide. The Reserve Bank raised the cash rate by 25 basis points to 4.35 per cent in May, its third increase this year, adding further pressure to mortgage holders and reducing borrowing capacity for buyers.
In Sydney, total dwelling values fell by 0.9 per cent in May and are now down 2.1 per cent over the past three months. The fall was led by houses, which dropped 1.1 per cent over the month and 2.5 per cent since the start of the year. Sydney’s median house value, which passed $1.6 million in February, has now eased to about $1.58 million.
Melbourne also recorded another monthly fall, with total dwelling values down 0.8 per cent in May and 2.3 per cent over the quarter. House values fell 1 per cent, taking the median to about $958,000, while unit values were down 0.4 per cent.
Cotality research director Tim Lawless said the largest falls in estimated sales were in Sydney and Melbourne, down 17 per cent and 14.2 per cent respectively compared with a year earlier. He said advertised supply had also risen above average levels in both cities, giving buyers more choice and more leverage in negotiations.
The weakness in Sydney and Melbourne contrasts with continued gains in several smaller capitals. Perth house values rose another 1.4 per cent in May, taking the median to just under $1.1 million after a 25.6 per cent rise over the past year. Brisbane house values increased 0.8 per cent over the month and are now 18.6 per cent higher than a year ago, with the median reaching about $1.23 million.
Values also rose in Adelaide, Hobart and Darwin, while Canberra joined Sydney and Melbourne in recording a fall. Regional markets continued to outperform the capitals, with values rising 0.6 per cent in May, although Cotality said that was the weakest regional monthly gain in a year.
The slowdown follows the federal government’s announcement of major changes to negative gearing and capital gains tax. The 2026-27 Budget says negative gearing will be limited to new builds from 1 July 2027, while existing arrangements will remain unchanged for properties held before Budget night. The government says the policy is designed to direct tax support towards new housing supply.
The changes have triggered debate over whether investor demand will weaken further. ABC reported Housing Minister Clare O’Neil said the government’s tax changes were not the main driver of any potential fall in house prices, arguing interest rates were playing a larger role. She said Treasury modelling forecast only a “mild” impact from the reforms, while some private analysts have warned prices could fall more sharply if investor activity pulls back.
Rental markets remain tight despite the cooling in sale prices. Cotality reported advertised rents rose another 0.6 per cent in May, taking annual rental growth back to 5.9 per cent, while the national vacancy rate tightened to 1.5 per cent.
Lawless said renters may be nearing the limit of what they can afford after rents rose by about $204 a week over the past five years.
“With the cost of renting up about $204 a week over the past five years, renters are likely to be at or approaching a ceiling on how much they can pay, potentially driving structural changes in rental demand,” he said.
The latest figures suggest Australia’s housing market is entering a more uneven phase. Buyers in Sydney and Melbourne may find more negotiating power as listings rise and sales slow, but affordability remains stretched, particularly with interest rates at 4.35 per cent.
For the Albanese Government, the softer market will fuel debate over whether its tax changes will help first-home buyers or discourage investors at a time when rental supply is already tight. For homeowners, the message is clearer: the rapid gains of the past year are fading, and Australia’s biggest property markets are now moving in reverse.
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