House price growth set to pick up speed in larger capital cities

Domain’s chief of research and economics, Dr Nicola Powell, said that Australia’s two larger capital cities are positioned to benefit the quickest from recent interest rate cuts.

“Lower interest rates, cheaper borrowing, and targeted support for first home buyers will keep prices rising, especially in Sydney and Melbourne, which are most sensitive to rate changes,” she said.

At the end of FY26, Domain’s findings forecast that Sydney’s median house prices will reach a record $1.83 million, marking an increase of approximately 7 per cent ($112,000 more).

Powell said that the projected $112,000 capital gains on a median house in Sydney over FY26 would outpace the wage of $103,000 that a full-time employee earns before tax.

Despite the city’s worsening affordability, Powell said that the effects of lower borrowing costs from the RBA’s last two interest rate cuts are expected to heavily contribute towards Sydney’s price growth in the short term.

“This reflects the higher levels of debt and willingness to take on leverage, so shifts in borrowing costs have a larger impact on the market in the near term,” Powell explained.

Additionally, Powell said that Sydney’s low unemployment rate, rising incomes and “sluggish uplift” in home approvals were also expected to push prices higher over the year.

The report showed that Sydney’s unit prices are also set to accelerate over the next year, with the city’s median price expected to register at $889,000, representing a potential 6 per cent growth ($53,000 more) over FY26.

While Powell said that affordability constraints first home buyers, incentives such as the recently expanded First Home Guarantee scheme would likely push them towards units.

She said that unit prices are still set to trail behind the stronger price momentum of the detached house market.

“Houses also tend to outperform over time because land values typically rise faster than building costs, and houses usually have greater land exposure,” Powell said.

“In turn, the price gap between houses and units is expected to widen further to historically high levels of 106 per cent by the end of FY26,” she added.

Similarly, Domain’s findings showed that Melbourne’s house prices are expected to lift over the second half of 2025 and surge to a record median value of $1.11 million by the end of FY25.

Powell explained that the projected house price growth of 6 per cent ($66,000 more) in the Melbourne market would mark a full recovery from the city’s previous downturn in values during the years 2022–24.

Sydney’s price gap over Melbourne has jumped from 26 per cent in 2019 to 63 per cent by March 2025, making Melbourne increasingly attractive to price-sensitive buyers.

Although Powell said Melbourne’s affordability positions it for growth, she highlighted that Victoria’s comparatively weaker economy and state-specific challenges could dampen buyer sentiment.

“Higher taxes and a more limited capacity for infrastructure investment could make it less attractive than other states,” Powell added.

The report showed that Melbourne’s unit prices are also anticipated to rise off the back of lower interest rates and relative levels of affordability compared to the housing market.

Powell said that Melbourne’s median unit price is forecast to reach $584,000 by the end of 2025, registering 3 per cent below the market’s 2021 peak for unit prices.

While the two larger capital cities are expected to accelerate, Domain noted that the pace of growth in Perth, Brisbane and Adelaide markets are set to slow over the next 12 months.

Powell said that the smaller capital’s deceleration was more akin to a stabilisation in the pace of growth than the three markets’ significant upswing in recent years.

Over the course of FY26, the report showed that Brisbane house prices are expected to grow 5 per cent to $1.09 million, and Adelaide is expected to grow 4 per cent to $1.05 million.

Domain’s data showed that Perth’s house prices will notch up 5 per cent growth to $982,000 by the end of FY26, which will position the city to reach the million-dollar club by the end of 2026.

More reserved outlook for house price growth than years prior

Even though Powell noted that the pace of price growth is already accelerating within the Sydney and Melbourne markets, she said price growth would depend on the various market conditions.

“East coast markets are regaining momentum, but growth will depend heavily on local factors, like affordability and population changes,” she said.

Powell said that the prospect of future rate cuts would likely increase buyer capacity across the nation, but warned that the upswing in price growth is expected to be more modest than previous rate-cutting cycles.

“This reflects forecasts of smaller, more gradual rate reductions and ongoing affordability challenges, with housing costs continuing to take up a significant portion of household income in most capital cities,” she concluded.