Downturn in progress for Sydney and Melbourne markets

In Sydney and Melbourne, values fell over the month, down by 0.2 and 0.6 per cent, respectively, during the quarter.

According to Cotality’s research director Tim Lawless, the decline trend in Sydney and Melbourne has been evident since December last year.

“Since the end of November 2025, Melbourne values have retreated by 0.9 per cent, and the Sydney market is down 0.4 per cent,” Lawless said.

He said that signs of a price downturn across both cities were evident, as auction clearance rates softened.

“Auction clearance rates have a close relationship with trends in housing values, especially in Sydney and Melbourne where a large portion of homes are taken to market via auction,” Lawless told REB.

He said that, with clearance rates now below 60 per cent in both cities, the balance has shifted, giving buyers greater leverage at the negotiation table.

“Property investors tend to be motivated by opportunities for capital gain, so an easing in the rate of growth and growing risk of values falling is likely to see less investment in the housing market.

“Real estate professionals will need to work with their vendors to ensure they understand changing market conditions. Their clients may need to adjust their price expectations and marketing strategies as the market softens.”

Additionally, data showed a widening divide across value tiers, with lower-priced markets leading growth in most capitals, especially Sydney, where upper-tier values fell 1.8 per cent while lower-tier values rose 1.8 per cent.

“It seems there is less demand at the upper price points, which is likely attributable to serviceability factors and credit availability,” he said.

Lawless said that a Cotality analysis found that a median-income household buying a median-priced home with a 20 per cent deposit would need to spend about 55 per cent of pre-tax income on repayments in Sydney and 39 per cent in Melbourne.

“Stretched serviceability is likely to be funnelling more mainstream demand towards the lower price points, competing with first home buyers and investors.”

Despite the lower quartiles of Sydney and Melbourne seeing higher capital gains, Lawless said price growth will likely not be enough to offset the broader market weakness.

“We are already seeing growth rates losing some moment across the lower quartile of the market in both cities, so the lower quartile is providing less upwards support.”

“As interest rates move higher, there is an increased downside risk for housing demand and housing values.”

“If these trends continue, we could see a more broad-based reduction in housing values over the coming months as lower quartile values level out or slip into negative change.”

According to Lawless, Sydney’s downturns over the past 20 years have ranged from a 7.0 per cent fall over 24 months in 2004–06 to a 13.0 per cent drop across 23 months in 2017–19.

“More recently, Sydney home values dropped 12.4 per cent in just 12 months as interest rates rose from their emergency lows in mid-2022,” he said.

He said Melbourne has seen similar cycles, with downturns lasting up to 22 months and the largest fall reaching 9.7 per cent during the 2017–19 correction.

“It’s fair to say that demand side headwinds are building, but it’s impossible to know how long any downturn might persist in Sydney and Melbourne. It really depends on the course of inflation, how high interest rates go, how long they stay there and what happens with labour markets.”

“Low supply levels across the newly built housing sector should help to keep a floor under housing prices to some extent, but the downside headwinds of lower demand as interest rates rise and confidence falls are a clear risk.”