House prices across Australia are projected to increase by at least 5% over the coming year, compounding a significant affordability crisis after values surged by 8.6% nationally in 2025.
Nationwide Growth and Capital City Hotspots
Data from property analytics firm Cotality reveals that every single state and territory capital city recorded price rises throughout last year. The most dramatic increases were seen in Darwin, where values skyrocketed by 18.9%, followed by Perth at 15.9% and Brisbane at 14.5%.
Sydney, the nation's most expensive market with a median value now exceeding $1.28 million, experienced a more moderate but still substantial gain of 5.8%. This nationwide annual rise marks the largest jump in home values since 2021, though the pace of growth did show signs of slowing towards the end of the year.
Economic Headwinds and Supply Shortages
Most property analysts anticipate continued price growth in 2026, primarily driven by a persistent imbalance where demand heavily outweighs available supply. However, this growth is expected to be tempered by significant affordability constraints and the potential for interest rate increases.
Tim Lawless, Cotality's Research Director, noted that market momentum has cooled somewhat. "A 'higher for longer' setting on interest rates, alongside a resurgence in cost-of-living pressures and worsening affordability, looks to have taken some heat out of the market," Lawless stated. He emphasised, however, that "we are unlikely to see a material supply response in 2026 either," a factor that should help prevent a major slowdown in price growth.
The interest rate outlook remains a key concern. Two of the four major retail banks anticipate a rate hike at the Reserve Bank's first meeting of 2026 in early February, with none currently forecasting further cuts.
A Deepening Generational Divide
The relentless climb in property values is exacerbating a stark generational gap, placing home ownership increasingly out of reach for younger Australians. Analysis by financial comparison site Finder highlights the dramatic shift: over 40 years ago, the average home cost 3.3 times a person's annual income. Today, that figure has ballooned to more than 10 times annual income.
During the same period, the cost of an average city home has leapt from approximately $64,000 to almost $1 million. Taylor Blackburn, Finder's personal finance spokesperson, contrasted the experience of different generations: "For previous generations, home ownership was achievable with steady work and discipline. Today, Aussies face more years of saving, higher deposits and larger debt, all while pay packets haven't really kept up."
The rental market offers little respite, with national rents increasing by 5.2% in 2025 and having risen at an average annual rate of 7.4% over the past five years.
Looking ahead, forecasts vary but point firmly upwards. SQM Research predicts capital city home prices will rise between 6% and 10% in 2026, led by double-digit gains in Perth, Brisbane, Adelaide, and Darwin. AMP's chief economist, Shane Oliver, expects a slightly more conservative growth range of 5% to 7%.
The market's extreme performance over the past five years, with national prices up 46.8%, has been fuelled by relatively low borrowing costs and chronic supply shortages. Certain markets have far exceeded this average, with Perth and Brisbane soaring by 89% and 86.7% respectively. Investor activity, spurred by policies like negative gearing and capital gains tax discounts, has further intensified competition, often squeezing out prospective owner-occupiers and keeping them in the rental cycle.
