Property market set for growth in 2025, stronger gains in 2026

Australian property prices are forecast to continue their upward trajectory over the next two years

With unit prices outpacing houses as affordability constraints reshape buyer behaviour, according to new market analysis

The latest KPMG Residential Property Market Outlook suggests a moderated but steady growth pattern for 2025, with more substantial gains expected in 2026 as interest rates begin to ease and market confidence builds.

National forecast shows steady growth ahead

The property research indicates that house prices across Australia are projected to rise by 3.3% in 2025, followed by a more robust 6% increase in 2026. This represents a slight cooling compared to 2024’s national average growth of 5.1%, but still demonstrates continued market resilience despite economic headwinds.

For units (apartments and townhouses), the outlook is particularly promising, with prices forecast to increase by 4.6% in 2025 and 5.5% in 2026. This modest outperformance compared to houses marks a significant shift in market dynamics, with units expected to gain more buyer attention as affordability challenges persist.

The growth trajectory is anticipated to accelerate in the latter half of 2025, coinciding with potential interest rate reductions that economists believe could begin from the second quarter onwards.

City-by-city outlook reveals varying fortunes

The property forecast reveals considerable variation across Australia’s capital cities, with Perth emerging as the standout performer for house price growth in 2025 at 4%, while Darwin is expected to see the most modest gains at 1.2%.

Canberra and Melbourne are positioned to deliver solid performance with identical 3.5% house price growth, while Sydney is forecast to see a more conservative 3.3% increase. Brisbane follows at 3.1%, with Adelaide and Hobart trailing at 2% and 1.8% respectively.

The picture shifts notably in 2026, with Sydney reclaiming the top position for house price growth at 7.8%, followed by Melbourne at 6% and Brisbane at 5.6%. This anticipated acceleration aligns with expectations of improved economic conditions and lower interest rates by that time.

Melbourne’s property market appears positioned for a potential comeback after underperforming in recent years. Based on current median values, the Victorian capital could see its typical house price rise by approximately $31,000 this year and potentially another $55,500 in 2026, pushing its median house price close to the $980,000 mark.

However, some market observers remain cautious about Melbourne’s prospects, with certain real estate executives suggesting the forecasts may be overly optimistic given current market conditions and the lingering effects of property tax changes.

Units outpacing houses signals market shift

One of the most notable trends highlighted in the forecast is the expected outperformance of unit prices compared to detached houses over the coming two years. This shift is primarily attributed to the growing affordability challenges in capital cities, where escalating house prices have left many potential buyers exploring alternative options.

Unit price growth is expected to be particularly strong in Sydney and Perth (both 5% in 2025), while Melbourne’s unit market is forecast to see 4.7% growth this year before surging to a nation-leading 7.1% in 2026.

This trend reflects the growing appeal of attached dwellings as a more accessible entry point to the property market for first-home buyers and investors alike. With the median unit price substantially below house prices in most capital cities, apartments and townhouses represent a more financially viable option for a larger pool of potential buyers.

The limited approval of new unit developments is also cited as a factor likely to put upward pressure on existing unit prices, particularly in Melbourne where construction costs have risen significantly.

Market drivers point to cautious optimism

Economic analysts attribute the property market’s continued growth prospects to several key factors, including persistent supply shortages, robust population growth, and anticipated shifts in monetary policy.

Despite high interest rates and inflation throughout 2024, the property market demonstrated remarkable resilience, with demand consistently outstripping supply across most segments. Even the much-discussed “fixed-rate cliff” — the transition of mortgage holders from lower fixed rates to higher variable rates — had only minimal impact on the market, with households generally adapting well to increased repayments.

Building approvals are showing early signs of improvement, potentially addressing some of the supply constraints that have driven price growth. However, economists note that the time lag between approvals and completions means any meaningful increase in housing supply is unlikely to materialise until late 2025 or 2026.

The anticipated easing of interest rates from mid-2025 onwards is expected to boost market confidence and stimulate buyer activity, particularly in the second half of the year. This, combined with potentially relaxed lending conditions and improved investor sentiment, should support continued price growth through 2026.

Rental market expected to ease

For those in the rental market, the forecast offers some cautiously positive news. After reaching a peak growth rate of 7.8% in March 2024 and moderating slightly to 6.7% by September, rental price growth is expected to ease further over the next two years.

Economists project annual rental growth of between 3.5% and 4.5% through 2025 and 2026, reflecting normalising migration patterns and gradually improving housing supply. While this represents a significant cooling from recent peaks, it remains above long-term historical averages.

The moderation in rental growth could have flow-on effects for the broader property market. High rental costs have been pushing some tenants towards home ownership, adding to buyer demand and supporting price growth. A more balanced rental market might ease some of this pressure, contributing to more sustainable price growth aligned with long-term averages.

Looking ahead with measured expectations

Property market forecasts always come with caveats, and market analysts emphasise that regional variations and economic shifts could significantly influence actual outcomes. The timing and extent of interest rate cuts remain particularly critical variables that could either accelerate or dampen the projected growth.

For Melbourne specifically, property experts note that while the forecasts may appear optimistic, they should be viewed in the context of recent market underperformance. Even with the projected growth over the next two years, Melbourne’s property values would likely remain below their former peak, representing more of a recovery than an unprecedented boom.

As always, prospective buyers and investors are advised to focus on their specific circumstances and long-term objectives rather than being swayed by market predictions alone. Nevertheless, the overall outlook suggests continued property price growth at a more moderate and sustainable pace than seen in previous boom cycles.

Further questions

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