The Australian housing market is showing signs that the rapid growth pace is easing, reflecting significant constraints imposed by record-high unaffordability and the expectation that interest rates will remain elevated. Cotality’s national Home Value Index (HVI) increased by 1.0% in November, marking the third consecutive month of growth at or above one percent. However, this pace represents a moderation from the 1.1% growth recorded in October.
The subtle slowing of the national headline result is influenced heavily by trends in Australia’s two largest capital cities. Housing values in Sydney rose by 0.5% in November, and Melbourne values increased by 0.3%, weighing down the national average. This lower monthly gain in Sydney, in particular, suggests that affordability constraints are placing a ceiling on growth, as the city’s monthly growth rate appears to have peaked at 0.9% in August.
Divergence and Serviceability Barriers
The easing in large capitals contrasts sharply with the performance of mid-sized capitals, a divergence trend similar to late 2023 and 2024. Every capital city other than Sydney and Melbourne recorded growth of at least 1.0% in November. Perth led the nation with a solid 2.4% surge in values, driven by elevated buyer demand and listings holding more than 40% below average.
The sources highlight that record levels of housing unaffordability are a major factor contributing to the slowdown. As of the September quarter, the national dwelling value to household income ratio reached a record high, with the median dwelling value being 8.2 times higher than the annual pre-tax household income. Additionally, the income required to service a mortgage at the median value reached a near-record 45.0%.
These stretched affordability and serviceability measures are already impacting market dynamics, skewing growth in housing values towards lower price points. Across most state capitals over the past three months, the lower quartile of the market has seen the fastest rise in values. As serviceability barriers become more prominent, fewer borrowers will be able to access credit, which is likely to limit the future magnitude of home value growth.
Interest Rates and Policy Outlook
On the demand side, the rebound in inflation above the Reserve Bank of Australia’s (RBA) target range, combined with the expectation that interest rates will not be cut anytime soon, is likely to dampen housing sentiment. Stable interest rates will exacerbate the serviceability challenge, offsetting recent increases in borrowing capacity which have already been eroded by higher housing prices.
While APRA’s recent policy announcement to limit high debt-to-income (DTI) ratio loans to 20% of new lending signals that the regulator is on alert, the sources suggest its impact on price growth will be limited, affecting only the margins of borrowing activity, especially since the majority of recent mortgages remain below a DTI of six or more.
Despite the growing headwinds, the upside factors—such as persistently low supply levels and rocketing credit growth for housing investment—are currently outweighing the downside risks. Investors, in particular, remain highly engaged, motivated by the expectation of long-term price increases.
Cotality anticipates that home values will continue to rise through 2026, but the pace of gains is expected to slow as affordability and serviceability factors eventually put a ceiling on further price hikes.