Sydney, Melbourne tipped to lead housing price drops as market cools

Domain forecasts Sydney could see the largest house price declines nationally, of up to $122,000. (ABC News: Grant Wignall) Domain forecasts house prices could drop up to 7 per cent in Sydney and up to 8 per cent in Melbourne over the next year, as interest rate hikes and tax policy changes impact the market. A separate report from Cotality showed the median gain from home resales hitting a record in the first quarter of the year, as sellers benefited from years of price rises. Domain expects unit prices to outperform houses in the coming financial year, as first-home buyers look for affordable options. Link copiedShareShare articleUp to $122,000 could be wiped off the value of the typical Sydney house over the next year, while Melbourne's median house price could drop below $1 million, Domain forecasts. The real estate platform has published housing price forecasts for the next financial year and has tipped substantial falls for the Sydney and Melbourne markets, with prices in Canberra also facing downward pressure. The look-ahead comes after months of the property market losing momentum, with national dwelling values flatlining in May, and Sydney, Melbourne and Canberra already seeing falls, according to Cotality. Domain's forecasts for the 2027 financial year noted "a more fragmented and constrained market", as higher interest rates and tax policy changes affect both borrowing capacity and buyer demand. The Reserve Bank hiked rates in February, March and May this year, and the full effects are still washing through the economy. Domain chief residential economist Nicola Powell said the housing market was no longer moving in lock-step around the country. While the Sydney, Melbourne and Canberra markets are forecast to see falls, price growth is expected to continue in Brisbane, Adelaide and Perth. Across most markets, units are tipped to outperform houses, with Domain noting that first-home buyer schemes and affordability constraints will drive the price divergence, particularly in Sydney, Brisbane and Perth. It said the hit to borrowing capacity from interest rate rises had constrained purchasing power, meaning first-time buyers were increasingly entering the market via units. Units are the only type of housing attainable for some buyers. (AAP: Dan Himbrechts) Domain's forecasts have assumed the RBA's cash rate will peak at the current level of 4.35 per cent, and there will be a rate cut in the second quarter of 2027. However, the prospect of further rate hikes has been acknowledged as the "principal downside risk" to their forecasts, which would push prices toward the lower end of the ranges published in the report. The Domain report said the federal budget's negative gearing and capital gains tax discount changes are adding a "structural shift on top of a cyclical one". Clare O'Neil has acknowledged that the property market is undergoing a correction. On Wednesday, Housing Minister Clare O'Neil described the recent cooling market conditions as a "correction" after years of extraordinary growth. "House prices have gone up just in that time by more than 50 per cent and we are seeing a correction on that," the minister said. Domain's Dr Powell told The Business she would not label it a correction yet. "We are seeing softer market conditions and that's really being led by Sydney and Melbourne, and we're seeing that come out in weaker [auction] clearance rates," she said. "I think a correction would be where we're seeing a significant drop in property prices, I'm talking in excess of 10 per cent, and that is not what we're currently seeing unravelling." The drop in prices is significant, but not everyone agrees it constitutes a "correction". (ABC News: Jordan Young) While Domain's forecasts are for falls in Sydney, Melbourne and Canberra, they do not reach that 10 per cent threshold in the worst-case scenario. "We've got to remember there are different dynamics across our different capital cities and we still have an undersupplied housing market," Dr Powell said. She said there are behavioural factors that will stem falling prices, as sellers will pull their home off the market if they don't think they will get what they believe it is worth. Additionally, she said high construction costs would also contribute to capping price falls. "It is still higher costs to replace a home than it is to buy an established home." Despite the talk of a housing downturn, it is far from a doom-and-gloom situation for most existing property owners. Property research firm Cotality released its quarterly 'Pain and Gain' report, tracking profits and losses from home resales. Cotality analysed nearly 101,000 residential property resales made in the first quarter of the year, and found 96 per cent made a nominal profit for the seller. There are warnings that rental prices may increase in the short-term. (ABC News: John Gunn) That was up slightly from 95.9 per cent in December and the strongest resul

Sydney, Melbourne tipped to lead housing price drops as market cools

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