Affordable Australian house prices fall faster than luxury homes as property investors retreat - realestate.com.au

Over the past year, affordable housing in Australia had been faring better than luxury properties, but recent trends indicate a significant shift. Following the federal budget announcement in May, high-end homes have started to maintain their value more effectively, while lower-priced properties have seen sharper declines.

This change is particularly notable given the earlier government policies aimed at boosting the affordable housing segment. The introduction of an expanded 5 percent deposit scheme in October 2025 allowed more first-time buyers to enter the market. With reduced deposit requirements, no income restrictions, and increased property price limits, many buyers were able to make purchases sooner, leading to a surge in demand for more affordable houses and apartments.

As a result, by early 2026, the affordable housing market was thriving even as luxury properties began to see a downturn due to rising interest rates. An analysis comparing property values across eight major Australian cities highlighted this trend. In January, cheaper homes were outperforming their more expensive counterparts by an average of 1.3 percentage points over a three-month period. The trend was similarly reflected in the unit market.

However, by September, this situation had reversed. More expensive homes were now outperforming cheaper ones by 0.18 percentage points, while high-end units showed an advantage of 0.32 percentage points. Despite this, it is essential to note that prices across the overall market are still in a general decline. What has changed is that lower-priced properties are experiencing a more rapid drop in value.

The primary factor behind this shift is the budget's modifications to negative gearing and capital gains tax, which have led to a retreat of investors from the market. Traditionally, property investors have focused on the more affordable segment of the housing market due to lower entry prices and appealing rental yields. However, the budget changes, enacted after May 12, have significantly reduced the tax benefits associated with purchasing established investment properties, altering the financial appeal of investing in this market.

This withdrawal of investor demand has particularly affected the affordable housing segment, which had previously benefited from increased activity among first-time buyers. The rising interest rates have compounded this slowdown, but the budget adjustments provide a clearer picture of why the dynamics between affordable and luxury properties have shifted so dramatically.

For first-time buyers, this presents a challenging situation. While they naturally desire the most affordable prices before making a purchase, the reduced competition from investors can facilitate their entry into the market, especially with the support of the 5 percent deposit scheme. However, once they have purchased a home, their focus shifts to the appreciation of their property's value, complicating long-term prospects.

The likelihood of investors returning to the market in the near future appears low. Previous analyses suggest that to offset the budget changes, rental yields would need to rise from around 3.95 percent to 5.15 percent. This adjustment would necessitate either a 30 percent increase in rents or a 23 percent decrease in property prices, or a combination of both. Until these conditions are met, it seems likely that affordable properties will continue to underperform, even as the broader market begins to recover.

Nerida Conisbee, chief economist at the Ray White Group, emphasizes the complexity of the current situation and its implications for both first-time buyers and investors alike.