In a mixed 2026 market, property hotspot opportunities still exist

It’s a wonderful new year and the stage should be set for a property market and economic rebound.

The dynamics of the property market are mixed, with an economy just meandering along and state and federal governments’ policies colliding.

So what can we make of where we have found ourselves at the start of 2026?

Interest rates' impact

We’ve seen some economists arguing recently that interest rates and house prices don’t have that much to do with each other.

With an against-the-tide rate hike this month, we’re about to hear that argument go quiet for a while.

Rate rises do matter, as they restrict the amount people can borrow, push up the cost of living for many and slow the economy over time.

It’s not unusual for inflation numbers to bounce around a bit as they descend from short-term heights – that’s what happened in the 1970s, 1980s and 1990s.

That history suggests we could see that rise reversed, possibly this year, despite the market predicting another hike.

There’s one thing for sure; this new environment is cutting across a decade and a half of property buyers expecting interest rates to always be set at “emergency lows”.

Many borrowers have become used the idea that rates will always be flat or falling and this mindset has become baked into decisions like buying an investment or upgrading a home.

But the era of ultra-low rates looks to be over and it will take time for the market to adjust.

First home scheme running against the stream

Running counter to this new rate environment is the federal government’s first home buyer policy, featuring the Home Guarantee Scheme.

This scheme allows first home buyers to purchase a home up to certain limits with a deposit as low as 5 per cent. Lenders Mortgage Insurance (LMI) is provided by the government.

Like all first home buyer schemes it sounds good if you say it quickly and don’t think about it too much.

In reality, all it has achieved is drawing forward buyers and pushing up prices in areas with homes around and below the scheme’s cap: $950,000 in Melbourne, $1,500,000 in Sydney, $1 million in Brisbane and a variety of limits for other centres and rural areas.

We can see the result of this scheme in the performance numbers for the December quarter when the scheme introduced revised caps for all regions.

According to Cotality, 89 per cent of suburbs with properties eligible for the scheme had a stronger growth rate in the December quarter compared with those above the caps.

The two-stream pattern is consistent across Australia, but the difference is strongest in Sydney, where the price of homes under the cap rose 2.3 per cent but fell slightly for properties ineligible for the scheme during the December quarter.

Then there’s a mosaic of other factors at play.

Immigration, which had surged four years ago, is now falling. Rents are rising across the country as are rental regulations. And the government’s social home building program is years away from producing anything.

Yes, it’s a confused picture.

While this muddle includes many factors investors look at when assessing whether the market will rise or fall this year, it’s important to look through current conditions to the medium and long term.

There are segments of the market set to gain in the next year or two, which also have the right factors for the longer term.

What property types look set to gain?

With the government encouraging first home buyers to borrow heavily, the benefits will mostly pass to the current owners of properties within the cap.

Many of these beneficiaries will be looking to upgrade to a better home, in the case of growing families, or downsizers looking to capitalise on the price of their family home.

We had a great example of how this plays out with a small two-bedroom home we are representing in Ovens Street, Yarraville, in Melbourne’s inner west.

At the first inspection, we had a genuine crowd through, many of those interested were younger upgraders selling their apartments to take advantage of the pulse of first home buyers.

This is a common theme we are hearing from agents across Melbourne as well as from our contacts interstate.

Houses below the cap, in particular, look set to have a better than average year. This interest should be felt with both smaller detached homes in the inner suburbs and family homes around the cap in well-established outer suburbs.

Cashed-up regional property buyers

Two and a half years ago, as many as a quarter of all sales in Queensland were accounted for by cash buyers. This trend was strongest outside Brisbane but was also important across many regional centres in NSW and across the country.

It’s interesting to note this happened at the same time as the recent interest rates peak.

These cashed up buyers should become influential again this year and that should benefit the regions.

Our firm is active in four of Victoria’s regional markets and demand for properties in these markets remains buoyant, with cashed up older buyers joined by younger families seeking to establish themselves in these centres.

For instance, in Bendigo, its relative affordability compared to Melbourne, a robust university and government employment sector, and solid population growth has seen some strong sales data.

Examples of top-performing suburbs for houses this year include California Gully (up by 21 per cent), Ironbark (18 per cent), North Bendigo (20 per cent), Jackass Flat (21 per cent), Long Gully (20 per cent), and Eaglehawk (19 per cent).

While sales are strong, the supply of investment grade houses and units in these markets is becoming stretched.

We expect these conditions of strong demand and shrinking supply to translate into a good medium-term prospects for investment grade property in many larger regional centres.

Good prospects include centres like Wollongong, Geelong, Toowoomba, Launceston, Port Stephens, Rockhampton and Ballarat.

The government’s muddled approaching to housing and property investment looks set to continue, but for focused investors, 2026 remains a year of opportunity.