First-home buyer schemes support activity, yet shrinking pockets of affordability constrain options for new entrants
Confidence in Australia’s housing market remains firm at the start of 2026, but sentiment is increasingly split between states as affordability pressures and interest rate uncertainty reshape conditions, according to new research from Cotality.
The Decoding 2026 report, based on responses from real estate agents and finance professionals, found 87% of participants expect dwelling values to rise over the next 12 months, while only 3.5% forecast price falls. Almost half anticipate gains of more than 5%, underscoring ongoing optimism after broad-based increases through 2025.
Cotality’s December Home Value Index showed housing values rose across all capital city and regional markets last year. National dwelling values were up 8.6% in 2025, adding about $71,400 to the median home value.
Tim Lawless (pictured right), research director at Cotality Australia, said the upswing lost momentum late in the year as borrowing capacity and rate expectations became more binding constraints.
“Housing conditions were strong through most of 2025, which explains the broadly positive sentiment,” he said. “However, national averages distort the variation of performances and market conditions at a local level, and it’s those differences that are becoming more important as affordability and policy settings diverge.”
Smaller states seen as strongest prospects
Respondents identified Queensland, Western Australia and South Australia as the markets with the strongest outlook heading into 2026, reflecting several years of outperformance and ongoing demand.
In Queensland, 89% of those surveyed expect prices to climb this year, with more than half tipping growth above 5%. Expectations in Western Australia are similarly upbeat, supported by demand spread across multiple price bands, which has underpinned more stable growth.
South Australia’s positive outlook is seen as grounded in relative affordability and constrained housing supply.
“Strong internal migration, tighter rental markets and a persistent shortage of housing have combined to support all three of these markets,” Lawless said. “Those fundamentals remain largely intact but it’s not surprising to see Queensland and Western Australia agents optimistic about price growth in 2026 given their respective fundamentals and economic prospects.”
Constraints tightening in New South Wales and Victoria
Sentiment in New South Wales remains positive overall but is increasingly conditional, with high dwelling values and stretched serviceability making price expectations more sensitive to rate movements.
Victoria, by contrast, continues to trail the rest of the country after recording the weakest state performance in 2025. While a majority of respondents still expect prices to rise, confidence is tempered by higher property taxes, reduced investor participation and softer population growth.
“Victoria stands out for the scale of investor selling, policy settings and higher holding costs all of which have weighed on activity, even as first home buyers now account for a larger share of lending,” Lawless said.
First-home buyer schemes support demand, but caps bite
The report indicates policy support has lifted activity among first-home buyers. More than three-quarters of surveyed real estate agents reported increased enquiry and transactions following the expansion of the First Home Guarantee. Competition has intensified around properties priced near the scheme’s thresholds.
Federal Treasury figures show more than 21,000 first home buyers have used the expanded 5% deposit scheme since October. However, affordability remains a major obstacle, with fewer than half of Australian suburbs now sitting below First Home Guarantee price caps, a sharp decline compared with a year earlier.
Outlook positive but risks are building
Overall, the industry still expects residential values to rise in 2026, but confidence is becoming more qualified. Affordability ceilings, uncertainty about the timing and extent of any interest rate changes, and uneven conditions between states and regions are all weighing on sentiment.
“The market is entering 2026 from a position of strength,” Lawless said. “However, there is a cloud of uncertainty around inflation and interest rate settings as well as affordability challenges, all of which are likely to weigh on housing confidence. Given we aren’t likely to see a material supply response in 2026 either, this should help to offset any downside risk to home values trending substantially lower.”
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