Sydney and Melbourne drag national market into reverse as mortgage stress climbs

For the first time in more than a year, Australia’s housing market has effectively stopped moving.

The latest monthly figures from both Cotality and PropTrack show national dwelling values were flat in May, confirming a broad-based slowdown that is now being weighted by Sydney and Melbourne.

According to Cotality’s Home Value Index, national dwelling values recorded zero growth in May, while values across the combined capitals fell 0.1 per cent. Sydney posted a monthly decline of 0.9 per cent and Melbourne fell 0.8 per cent, extending the weakness that has emerged since the start of the year.

The falls leave Sydney 2.1 per cent below its November 2025 cyclical peak and Melbourne 2.9 per cent below its late-2025 high.

PropTrack’s figures tell a similar story. National home prices slipped 0.04 per cent in May after declining 0.1 per cent in April, while Sydney and Melbourne both recorded their third consecutive monthly decline, falling 0.2 per cent each.

The result marks a sharp shift from the strong gains recorded through much of 2025.

Sydney and Melbourne lead the downturn

Sydney and Melbourne are now clearly acting as the primary drag on national performance.

Tim Lawless, Research Director, Cotality, said demand-side pressures had been building for some time.

“We are continuing to see multi-speed conditions across Australia’s housing sector, with Perth and Melbourne at opposite ends of the spectrum,” Mr Lawless said.

“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.”

Mr Lawless noted the slowdown had been developing well before the recent round of interest rate increases, geopolitical uncertainty and Federal Budget tax changes.

Instead, affordability constraints and borrowing capacity limits have gradually eroded buyer demand across the country’s most expensive housing markets.

The weakness is also becoming evident in transaction volumes.

National home sales over the past three months were estimated to be 2.2 per cent lower than a year ago and 4.1 per cent below the five-year average. Sydney and Melbourne recorded the largest falls in sales activity, down 17 per cent and 14.2 per cent respectively compared to a year earlier.

Advertised stock levels have also increased across both cities, giving buyers greater negotiating power and contributing to softer selling conditions. Clearance rates across the capitals have hovered around 50 per cent through the second half of May.

Regional markets still outperforming

While the eastern seaboard capitals are slowing, regional markets continue to demonstrate greater resilience.

Cotality reported combined regional dwelling values rose 0.6 per cent during May, compared with the 0.1 per cent decline across the capitals. Annual growth across regional Australia remains a healthy 11.8 per cent.

Regional Western Australia led monthly growth at 1.9 per cent, while all broad regional markets continued to record positive value growth.

Several smaller capital cities also continue to outperform.

Perth and Darwin recorded monthly gains of 1.5 per cent, while Brisbane and Hobart rose 0.9 per cent and Adelaide gained 0.5 per cent. Annual growth remains strongest in Perth at 25.8 per cent, followed by Darwin at 20.3 per cent and Brisbane at 19.1 per cent.

However, even these stronger-performing markets are beginning to show signs of moderation.

REA Group Senior Economist Angus Moore said housing growth had clearly stalled nationally.

“Home price growth has clearly stalled as the effects of this year’s consecutive rate hikes flow through,” Mr Moore said.

“The slowdown has been most notable in Sydney and Melbourne, with both cities posting their third consecutive decline in home prices.”

He added that Brisbane, Perth and Adelaide had also slowed materially after their exceptionally strong performances throughout 2025.

“With at least one further rate hike expected in 2026, and some pullback in investor demand post-Budget, prices are likely to continue to be soft.”

Property's super cycle may be ending

Additional analysis from AMP Head of Investment Strategy and Chief Economist Dr Shane Oliver suggests Australia’s extraordinary housing boom may be entering a new phase.

While Dr Oliver does not forecast a housing crash, he argues many of the structural tailwinds that drove the past decade of rapid price growth are beginning to weaken.

Higher interest rates, stretched affordability, slower population growth compared to the post-pandemic surge and policy changes affecting investors are all contributing to softer conditions.

Those forces align closely with Cotality’s assessment that affordability pressures, higher borrowing costs and weakening sentiment are now outweighing many of the factors that previously supported price growth.

Importantly, however, housing supply remains constrained.

Elevated construction costs, labour shortages and project feasibility challenges continue to restrict new dwelling completions, limiting the risk of a severe nationwide correction.

The total number of dwellings approved fell 3.4 per cent in April to 16,710, according to seasonally adjusted data released Tuesday (2 June) by the Australian Bureau of Statistics (ABS).

The news isn’t all bleak on the approvals front.

Private sector house approvals did fall 1.0 per cent but remain at elevated levels. This is the third consecutive month with over 10,000 private sector houses approved. The last time this occurred was during the final three months of 2021.

The total number of dwellings approved is 10.2 per cent higher in year-on-year terms.

Mortgage stress is becoming harder to ignore

Behind the housing slowdown lies a growing financial strain on Australian households.

The latest mortgage stress analysis from Martin North, Principal, Digital Finance Analytics, shows rising interest rates are continuing to place pressure on household budgets, particularly among highly leveraged borrowers.

While strong employment conditions have helped prevent widespread forced sales, the cumulative impact of higher mortgage repayments, insurance costs, utilities and general living expenses is increasingly affecting household cash flow.

“Over the past 12 months, 47 postcodes (out of 80 ranked for mortgage stress in capital cities) recorded increases in general mortgage stress,” Mr North said.

General mortgage stress refers to households in negative monthly cash flow, where regular expenses exceed income, including owner-occupier mortgage repayments.

A further 18 postcodes recorded increases in ‘severe mortgage stress’ in Q1 2026. This reflects a more acute level of financial strain where households are not just cash flow negative but more than 5 per cent underwater.

This growing financial pressure helps explain why demand is softening most rapidly in Sydney and Melbourne, where mortgage sizes are generally larger and borrowers are more exposed to rising interest costs.

The mortgage stress data also reinforces a broader theme emerging across the housing market: affordability has become the defining issue.

Even though unemployment remains low and most borrowers continue meeting repayments, many households now have less capacity to upgrade, invest or enter the market for the first time.

A market moving into a new phase

The latest housing data does not point to a market collapse.

Instead, it suggests Australia is transitioning from a period of broad-based growth into a more selective environment where local conditions matter more than national averages.

Population growth remains supportive, rental markets remain exceptionally tight and new housing supply continues to lag demand. National vacancy rates remain near historic lows at just 1.5 per cent.

But the days of almost every market rising together appear to be over.

As Cotality noted in its outlook, the most likely scenario is not a sharp correction but rather “a further loss of momentum and a drift towards lower home values”, with conditions remaining highly uneven across cities, regions and price points through the remainder of 2026.

Source: Cotality Home Value Index