Modest growth predicted as Sydney market shows signs of division

Australia remains a two-speed housing market, with Sydney and Melbourne lagging, but there are also clear market divergences within the Harbour City itself.

As a whole, the outlook for the Sydney market appears stable. It’s “moved into a more measured phase” with “relatively modest growth overall” expected, but zoom in closer and different pictures emerge.

High density apartment markets with plenty of supply are likely to remain under pressure, and outer-ring suburbs with large land releases are tipped to soften, according to experts.

Yet premium properties, such as larger family homes in the eastern suburbs and on the lower north shore, are expected to continue to shine.

“I expect established houses in tightly held, lifestyle-driven suburbs to outperform — particularly in the inner west, lower north shore, eastern suburbs and select pockets of the northern beaches where supply is consistently limited,” says aussieproperty.com’s Sydney property expert and Principal Licensee, Allen Habbouchi.

“Family homes close to transport, good schools and village amenities are still seeing solid competition.”

Sydney apartments under pressure

On the other hand, some apartment markets are facing pressure.

“I think high-density apartment markets with significant pipeline supply will remain under pressure, particularly where there’s little differentiation and heavy investor concentration,” Mr Habbouchi said.

Yet any substantial downturn in inner-city markets appears unlikely, with new REINSW figures showing vacancy rates plunged even further in January.

“The inner ring of Sydney experienced a sharp drop of 0.6 per cent in the availability of residential rental accommodation to be just 1.8 per cent,” said REINSW CEO Tim McKibbin. 

The president of the REINSW, Thomas McGlynn, who is also CEO of Sydney property group BresicWhitney, said that lack of supply, as well as the high price of houses, will help underpin apartment values.

“Tight rental supply will support the value proposition for investors,” Mr McGlynn told API Magazine.

“REINSW data shows Sydney’s inner city vacancy rate is the lowest it’s been in almost two years.

“With average Sydney house prices now more than double the price of units, demand for apartments will remain as buyers seek out more accessible options in the short-term.”

Mr Habbouchi said the high prices of houses would also drive demand for townhouses.

“Well-located townhouses with low strata and strong land value component should also perform well, as they appeal to downsizers and young families priced out of freestanding homes,” he said.

Quality investment-grade apartments were also expected to perform well.

“Investment-grade apartments, meaning boutique blocks, good floor plans, parking, and proximity to transport, should outperform generic high-density stock,” Mr Habbouchi said. 

And rental demand remained key.

“One factor that shouldn’t be overlooked is the rental market,” he added.

“Vacancy rates remain tight and rental growth has been significant. This is keeping investor interest alive despite higher holding costs.”

High rents luring buyers

According to Cotality, Sydney and Melbourne are “weighing on the headline numbers”, compared to the mid-sized capitals Brisbane, Adelaide and Perth, which had “continued their solid growth run”.

Sydney and Melbourne recorded dwelling price growth of 0.2 per cent and 0.1 per cent respectively in January, a “marginal pick up following the slight falls recorded in December.

“Both markets have values slightly down on their peak levels, with Sydney 0.1 per cent below the November 2025 peak and Melbourne values remaining 0.7 per cent lower than record highs recorded in March 2022,” Cotality notes.

According to its latest data, Sydney’s strongest price growth over the past year was seen in suburbs further afield from the city centre.

St Marys in the city’s outer west was the strongest performer, with prices growing 8.4 per cent to a median value of $1.01 million.

In Fairfield, in Sydney’s south-west, dwelling prices grew 6.5 per cent over the year to January, to a median of $1.17 million.

Gath Muhana, principal of Fairfield’s Century 21 Vasco Group, said growth was underpinned by very high rental demand.

The growth was also being fuelled by Fairfield’s relatively lower price point, compared to nearby suburbs such as Wetherill Park, Canley Heights and Smithfield.

“People who need something cheaper can drive five minutes down the road to Fairfield and purchase the same property for $100,000 to $150,000 less,” Mr Muhana told API Magazine.

He said there had been a relatively slow start to the year, in part due to this month’s interest rate raise, and because of the holiday period, but market interest was stirring again.

“This weekend we had five or six auctions and we’ve seen far more positive sentiment compared to the start of the year; it’s picking up now,” Mr Muhana said.

Mr Habbouchi said that overall, Sydney had entered a “measured phase”, after the “strong rebound we saw previously”.

“Over the next 12 months, I expect relatively modest growth overall — likely low to mid single digits — with performance varying significantly by suburb and price point,” he said.

“Over a 24-month horizon, I’m more optimistic. Sydney’s fundamentals remain strong: constrained housing supply, continued population growth and tight rental conditions. 

“Once there’s more clarity around interest rates I think confidence will return and we’ll see stronger, more broad-based growth again, particularly in quality owner-occupier markets,” Mr Habbouchi said.

Interest rates shape market sentiment

Mr McGlynn told API Magazine this month’s 25 basis point rate rise has had little impact on the market, though rates would remain central.

“The early signs show the latest interest rate rise hasn't had a significant impact on market activity,” he said.

“Sentiment matters though and it does affect how people perceive opportunity, so rates will remain a key theme this year”.

Mr McGlynn said he expected the Sydney market to remain stable over the next 12 to 24 months.

“There is healthy demand for quality properties and housing types across the board,” he said.

“Limited new supply, accessibility and lifestyle appeal will support continued activity.

“Overall, the fundamentals remain very solid.”

One segment to watch was the $2.5 million-plus market, he said.

“One part of the market that might feel more pressure in the short-term is what we’d generally call ‘the middle market’, where average properties are upwards of $2.5 million,” Mr McGlynn said.

“Purchasers of these homes are often second-home buyers, such as families or professionals looking to upsize, who are navigating competing pressures. 

“There’ll be many opportunities for buyers and sellers in this bracket across the year, but it may require more of a willingness to meet on price, particularly if a result is required within a specific timeframe or the property has limitations”.