Has the housing market downturn arrived?

Australia's housing market hit a brick wall in May, with Cotality's national Home Value Index recording zero growth for the month.

Sydney and Melbourne led the downturn, with dwelling values falling 0.9% and 0.8% respectively, leaving both cities 2.1% and 2.9% below their cyclical peaks recorded in November 2025. The ACT also recorded a decline, with values down 0.2% over the month.

Cotality research director Tim Lawless noted that the loss of momentum was already embedded in the market well before the events of recent months added to the pressure. 

"Most cities recorded a peak in value growth through spring last year as affordability and serviceability constraints increasingly weighed on housing demand," he said – a slowing that predated interest rate rises, the escalation of conflict in Iran, and the taxation changes announced in the May 2026 Federal Budget.

In other words, 2025's red-hot housing market – which delivered Perth values up 91.4% over five years and lifted Brisbane to a million-dollar house market – was unlikely to continue at that pace indefinitely.

Market facing a more complex set of headwinds

Recent developments, however, are likely to have a profound impact on the housing market going forward.

On the taxation front, the Albanese government's May 2026 Budget delivered the most significant intervention in property taxation in decades. If the Budget bill passes – and that’s an increasingly big if – negative gearing will be restricted for investors purchasing established dwellings, while the 50% capital gains (CGT) tax discount will be replaced with cost-base indexation and a minimum 30% tax on net capital gains.

It is inevitable that these changes will have a substantial impact on buying power.

A pre-Budget money.com.au survey found 39% of property investors would either step back from buying or sell existing holdings if the CGT discount were reduced, with a further 22% saying they would take similar action if negative gearing concessions were capped.

Independent modelling commissioned by the Property Council of Australia, the Real Estate Institute of Australia, and Master Builders Australia, and conducted by consultancies Qaive and Tulipwood, projects that over the next four years the Budget measures will reduce new housing supply by more than 8,700 dwellings, push rents up by as much as $9 per week, contract GDP by $864 million, and reduce construction employment by more than 3,800 jobs.

Treasury's own modelling is more optimistic, forecasting a rent increase of approximately $2 per week and a net addition of around 12,000 dwellings over the same four-year window.

Following the Budget, Westpac forecasted that Sydney values will decline 3% and Melbourne 4% in calendar 2026, while Brisbane, Perth, and Adelaide are expected to maintain positive but slowing growth.

Multi-speed conditions across the capitals

Not every market is retreating. Perth and Darwin led monthly gains at 1.5% in May, followed by Brisbane and Hobart at 0.9%, while Adelaide recorded a more modest 0.5% rise. But even in those markets, the pace of growth is clearly easing.

Selling conditions have softened as demand and supply rebalance. The weighted average clearance rate across the combined capitals was close to 50% through the second half of May, while listings are trending higher across most markets.

Nationally, estimated home sales over the past three months were tracking 2.2% lower than a year ago and 4.1% below the five-year average. Sydney and Melbourne recorded the steepest declines, with estimated sales down 17.0% and 14.2% respectively on levels a year ago.

Regional markets have shown greater resilience, with housing values rising 0.6% across the combined regionals in May – though even this was the smallest monthly rise recorded in a year.

"While the speed of value change remains very different from city to city, the direction is becoming more consistent, with most markets losing momentum as demand-side headwinds intensify,” said Lawless.

The question now is not whether Australia's housing market is cooling – the data makes that clear – but how much further the combination of rate settings, investor tax reform, geopolitical uncertainty, and stretched affordability will push values in the months ahead.

An end to the supercycle?

On the back of today's data, AMP chief economist Shane Oliver has revised his national price forecast from growth of around 3% this year to a decline of approximately 1% , with a further drop of around 5% forecast across 2026-27.

Oliver pointed to a convergence of headwinds driving the downturn.

The Reserve Bank of Australia (RBA) has raised rates three times, returning to prior 2023 cycle highs, with another hike expected in August. Rate hikes, Oliver explained, "cut how much buyers can borrow, hit confidence and can boost distressed sales".

Combined with record-low housing affordability, where "the ratio of home prices to wages and incomes is at record levels", buyer confidence has deteriorated sharply.

The federal government's Budget changes, meanwhile, have compounded the pressure on investor demand. Oliver said the changes mean "new investors will demand either lower prices or higher rents or some combination resulting in a higher starting point rental yield", and that banks will also reduce how much they can lend to investors due to their reduced cash flow under the new tax settings.

"It's a bit of a perfect storm for the property market," said Oliver. He raised the prospect of the 30-year super cycle upswing in Australian property prices coming to a close, although "while many of the conditions are falling into place it may be premature to call an end to the home price super cycle boom of the last 30 years until the supply shortfall comes under better control".

The critical wildcard, he said, remains the persistent housing shortfall of 200,000 to 300,000 dwellings.