House price falls tipped in Sydney and Melbourne should Reserve Bank of Australia raise interest rates

House prices are now expected to fall in Sydney and Melbourne — potentially wiping off more than $140,000 from the typical home with a backyard — should the Reserve Bank of Australia raise rates too high this year to tackle resurgent inflation.

New SQM Research modelling suggests two or three more interest rate increases, as financial markets are suggesting, would cause real estate values to fall in Australia’s two largest cities but still soar in provincial capital cities.

Sydney and Melbourne have posted much weaker growth and were tipped to falter this year, compared with Perth, Brisbane and Adelaide, which are still forecast to reap double-digit growth in 2026 even with rate rises, that would typically add $125,000 to house values.

“In summary, Sydney and Melbourne now forecast to record housing price falls,” managing director Louis Christopher said on Tuesday.

“They are the cities most sensitive to rate rises and Sydney has the largest exposure to the financial services sector, which may struggle in 2026.”

With inflation at 3.8 per cent well above the RBA’s 2-3 per cent target, the futures market is tipping two more rate hikes in 2026 that would take the cash rate back to 4.35 per cent for the first time since February 2025.

This would occur as inflation rose to 5 per cent by mid-year, reaching levels last seen in 2023 during the RBA’s last prolonged hiking cycle.

Under this scenario, Sydney’s mid-point house price would fall by 2 to 6 per cent in 2026, potentially knocking off $95,263 from the typical home with a backyard based on Cotality data.

This would see the median price fall from $1.588 million at the end of last year to $1.492 million by Christmas as Australia’s most expensive capital city market that relies on overseas migration for population growth.

Should rates rise three more times this year, taking the RBA cash rate to a 15-year high of 4.6 per cent, Sydney values would fall by 5 to 9 per cent, wiping $142,894 from the middle-market home and causing the mid-point price to sink down to $1.445 million.

This would be based on inflation rising to a new three-year high of 5.5 per cent by the September quarter.

Melbourne, now a more affordable big city market, was also vulnerable with SQM Research predicting a 1 to 4 per cent fall with two more RBA hikes, that would see the Victorian capital’s median house price fall by $39,247 back to $941,918.

If the RBA were to raise rates three more times this year, the city’s mid-point house price would fall by 4 to 7 per cent, possibly wiping off $68,682 from values and causing them to fall down to $912,483.

Soaring crude oil and petrol prices on Monday saw 10-year Australian government bond yields soar to the highest level since July 2011 when the Reserve Bank cash rate was at 4.75 per cent.

This suggests bond market traders are eyeing the prospect of the RBA cash rate rising to 4.6 per cent this year with three more rate rises, on top of February’s increase that took rates to 3.85 per cent.

Capital city markets that receive a big intake of interstate migration were still expected to continue seeing double-digit growth in 2026 if the RBA raised rates two more times.

“The commodities based cities have not been materially revised,” Mr Christopher said.

Brisbane house prices were expected to still increase by 7 to 11 per cent, but down from last year’s 14 per cent growth pace which surpassed Sydney’s 6.9 per cent increase and Melbourne’s 5.8 per cent rise for detached houses.

Queensland capital values were tipped to soar by $124,446 to a new record high of $1.256 million.

Perth values were forecast to rise by 10 to 13 per cent, down slightly from last year’s 15.7 per cent gain, which would see the middle house price rise by $127,799 to $1.111 million.

Adelaide house prices were tipped to rise by 7 to 11 per cent, adding $105,655 and taking the median to $1.066 million, with even stronger growth than last year’s 8.7 per cent increase.

Darwin, Australia’s most affordable capital city market, was tipped to see 12 to 16 per cent growth, that would see the median house price rise by $111,560 to $808,811, following on from last year’s 19.9 per cent increase.

Hobart house prices were tipped to grow by 3 to 6 per cent, down from last year’s 6.8 per cent rise, which would see values rise by $46,103 to $814,479.

Canberra values were forecast to rise by 3 to 6 per cent, down slightly from 6.4 per cent in 2025, that would see house prices rise by $62,457 to $1.103 million.