Rates, regulation, rebound? Australia’s property market cycle explained

The housing market moves in cycles, and a pullback in prices following record highs fits a familiar pattern.

Several years of strong growth took values to new highs earlier this year, before a resumption of interest rate rises knocked the wind out of the market.

A second blow to price growth came in the form of property tax changes introduced in the federal budget to disincentivise investors from purchasing established properties by restricting negative gearing to new builds only.

While the changes were intended to ease competition for first-home buyers and encourage new home construction, the uncertainty has exacerbated a downturn in the property market, with Australia’s national median home value declining over the past few months.

So where do these economic and policy impacts fit into Australia’s long-established housing cycle, and what does history tell us could come next?

How property market cycles work

Property markets move in cycles, with the different phases of the cycle typically triggered by broad economic factors or policy changes designed to influence buyer behaviour, and one phase leading to the next.

The growth phase is when prices are rising, typically due to demand for properties exceeding available supply, and lower interest rates enabling buyers to spend more.

Interest rate cuts increase borrowing capacities, giving buyers more to spend. Interest rate rises have the opposite effect. Picture: realestate.com.au/sold

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As prices rise, affordability deteriorates and pressures emerge that cool the market, typically in the form of higher interest rates or changes to housing or tax regulation.

Prices may then decline, and a quieter period often follows as vendors adjust expectations and buyers become more cautious. 

But when reduced competition draws buyers back, underlying demand builds and the supply of property remains tight, the recovery period begins as prices start to rise again.

Another growth phase then follows, typically triggered by interest rate cuts or demand-side housing policies such as first-home buyer grants and incentives.

Interest rate movements are the primary driver of market cycles as this influences how much buyers can spend on a property, said REA Group senior economist Anne Flaherty.

“Interest rates affect how little or how much you can borrow, and how much it costs to borrow,” she said.

“Last year when interest rates were reduced, we saw home price growth pick up. This year we’ve seen the reverse. We saw interest rates pick up again and that led to a slowdown in home price growth.

Carrots and sticks

Housing policies can also influence buyer behaviour at different points in the cycle.

Last year’s expansion of the federal government’s 5% Deposit Scheme to lift price thresholds and remove income caps and place limits encouraged more first-home buyers to enter the market, supporting growth at the more affordable end of the market.

With a reduced deposit hurdle, many first-home buyers were able to get into the market sooner, increasing overall housing demand at a time when interest rate cuts boosted borrowing capacities.

Some policy changes can have the opposite effect, such as the federal budget’s tax changes that ended negative gearing for established homes, which have deterred some investors from entering the market and reduced competition.

Lower interest rates and first-home buyer stimulus contributed to price rises last year. Picture: Julian Andrews.

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Uncertainty triggered by the policy had caused nervousness among buyers and vendors, Ms Flaherty said.

“We still really don’t know what the fallout from the budget is going to be, especially in terms of how it impacts investor demand but also what it does to other types of buyer demand,” she said.

“If we see first-home buyer demand really surge, that could make up for some of the lost investor demand.”

“But at the same time, in a market where home prices are falling, some first-home buyers may want to hold off buying until they feel comfortable that prices are not going to continue falling any more, especially those using the 5% Deposit Scheme.”

“The risk of moving into negative equity is quite significant where people are buying with a 5% deposit in a market where there is a downturn.”

When prices could rebound

Using history as a guide, market downturns don’t tend to last long, Ms Flaherty said.

“If we look at the more recent downturns we’ve seen in the property market, they’ve actually been quite short lived – under 12 months,” she said.

“Sometimes the magnitude of falls that we see are less than what you would expect given how much the interest rates rise.”

Sydney buyer’s agent Veronica Morgan said it was difficult to predict exactly how long it would take for prices to recover, but the most recent downturn that was triggered by changes to regulation targeting investors in 2017 lasted for several years.

“Back in 2017 when APRA stepped in to curtail investor lending, that had a very distinct and sharp impact on the property market, particularly in Sydney and Melbourne, which had both been booming until that point,” she said.

After peaking in mid‑2017, home prices fell during 2018 before bottoming out in mid‑2019 when regulatory easing and three interest rate cuts reignited growth.

“We know that ultimately we’ll get back to a period of time where prices start rising,” Ms Morgan said. “We won’t stay in this forever.”

The latest realestate.com.au Market Outlook predicts home prices will decline by 3% in Sydney and 4% in Melbourne over 2026. 

Brisbane and Adelaide are expected to end the year 5% higher, while prices are tipped to climb 6% in Hobart and 8% in Perth.

Source: realestate.com.au Property Market Outlook – June 2026

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But prices across the capitals are expected to rebound next year, rising by between 4% and 7% in 2027.

It’s possible for home prices to grow even amid high interest rates given Australia’s housing market is undersupplied, Ms Flaherty said.

“It all comes down to how many buyers are out there versus how many properties are for sale,” she said.

“Because of the level of competition out there, buyers are still having to fork out a lot for properties.”

Sydney house prices are expected to decline 3% in 2026 before rising 4% in 2027, according to the latest realestate.com.au Property Market Outlook. Picture: Getty

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The combined effects of interest rates and property tax changes are unlikely to crash the market, Ms Flaherty said.

“Expectations that home prices might crash seem quite unreasonable, because the actual fundamentals of the Australian property market haven’t really changed, in the sense that people still need somewhere to live and we still have a shortage of homes,” she said.

“Even if we do see home prices decrease this year as a result of higher interest rates and changed tax settings, if we take a longer term view we’re likely to see home price growth recover, maybe in the second half of next year or sooner, depending on the market.”

Buy the dip?

Ample homes for sale and reduced competition meant buyers were in a better negotiation position, Ms Flaherty said.

“For a lot of people there’s now a great opportunity to buy, especially at the start of a downturn where we see a lot of properties for sale but less competition.”

“With clearance rates in the low 40% range, that’s a market where it’s clear that there is a disconnect between what vendors are hoping to achieve and what buyers are willing to pay.”

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Meanwhile, upgrading homeowners can have an advantage transacting when the market is cooler.

“If you’re an owner occupier, you’re normally selling and buying in the same market,” Ms Flaherty said.

“In a market that’s really hot, there can sometimes be less confidence around the ability to get that next property, and how long it might take.”

“In a market where prices are weaker and they’re not growing as strongly, that can take some of the urgency out.”

However, Ms Morgan said many buyers may hold back until there were clear signs of a recovery.

“There’s opportunity out there for buyers if they want to take it, but most won’t,” she said. 

“Most will wait until they see social proof, and they’ll see that prices are actually rising before they get off their hands.”