Property prices in Sydney and Melbourne have declined sharply, with new data showing Australia’s two largest housing markets are dragging on national growth as higher interest rates, affordability pressures, and federal government tax reforms dampen buyer and investor confidence.
According to Cotality’s latest Home Value Index, capital city dwelling values remained flat in May, masking a growing divide between the weaker Sydney and Melbourne markets and stronger-performing cities such as Perth, Brisbane, and Adelaide. The Reserve Bank’s recent decision to lift the cash rate by 25 basis points to 4.35 per cent has further strained borrowing capacity and mortgage affordability.
Sydney recorded the steepest decline, with dwelling values falling 0.9 per cent in May and 2.1 per cent over the past three months. House values dropped 1.1 per cent during the month, bringing the median house price down from its February peak of more than $1.6 million to around $1.58 million.
Melbourne also experienced continued weakness, with dwelling values falling 0.8 per cent in May and 2.3 per cent over the quarter. House prices declined 1 per cent, reducing the median house value to about $958,000, while unit values slipped 0.4 per cent.
Cotality Research Director Tim Lawless said sales activity had slowed significantly in both cities, with estimated sales down 17 per cent in Sydney and 14.2 per cent in Melbourne compared with a year ago. At the same time, housing supply has risen above average levels, giving buyers greater choice and bargaining power.
In contrast, Perth, Brisbane, and several smaller capitals continued to post gains. Perth house values rose 1.4 per cent in May and are up 25.6 per cent over the past year, pushing the median value close to $1.1 million. Brisbane recorded a monthly increase of 0.8 per cent, with house values now 18.6 per cent higher than a year ago and a median value of approximately $1.23 million.
Adelaide, Hobart, and Darwin also recorded growth, while Canberra joined Sydney and Melbourne in posting declines. Regional markets continued to outperform capital cities, although growth slowed to its weakest monthly pace in a year.
The market slowdown follows the federal government’s decision to reform negative gearing and capital gains tax concessions. Under the 2026–27 Budget, negative gearing will be restricted to newly built homes from July 1, 2027, while existing arrangements will be grandfathered for properties owned before Budget night. The government says the changes are intended to encourage investment in new housing supply.
The reforms have sparked debate over their potential impact on property prices. Housing Minister Clare O’Neil has argued that higher interest rates remain the primary factor affecting housing demand and that Treasury modelling suggests only a modest impact from the tax changes. However, some analysts warn that reduced investor activity could place further downward pressure on prices.
Despite softer property values, rental markets remain under pressure. Advertised rents increased by 0.6 per cent in May, lifting annual rental growth to 5.9 per cent, while the national vacancy rate tightened to 1.5 per cent.
Lawless noted that renters may be reaching affordability limits after rental costs increased by roughly $204 per week over the past five years, potentially leading to long-term changes in housing demand.
The latest figures suggest Australia’s housing market is entering a more uneven phase. While buyers in Sydney and Melbourne may benefit from increased negotiating power as listings rise and sales slow, affordability remains a major challenge.
For the Albanese government, the softer market is likely to intensify debate over whether its housing tax reforms will improve access for first-home buyers or discourage investment at a time when rental supply remains constrained.