SQM Research has cut its 2026 housing forecasts, and the downgrade is not a small one. The headline change is that higher oil prices, renewed inflation pressure and the risk of more rate hikes have pushed the group’s base case for weighted capital city growth down to 0 per cent to 3 per cent, from 6 per cent to 10 per cent previously. Sydney and Melbourne now sit on the weak side of that reset, while Perth, Brisbane, Darwin and Adelaide still look relatively resilient.
That matters because it cuts against one of the market’s laziest habits: assuming all property moves together, and that “blue chip” always means safer in the short term. It does not. In a higher-rate environment, expensive markets with stretched borrowing costs can turn into the most rate-sensitive parts of the country. That is exactly what SQM’s latest scenarios are pointing to.
What changed and what didn’t
The change is the macro backdrop. SQM’s revised base case assumes the cash rate rises to 4.35 per cent by mid-2026 and inflation peaks at 4.4 per cent to 5.0 per cent for the June quarter. Under that scenario, it expects Perth to rise 10 per cent to 13 per cent, Brisbane 7 per cent to 11 per cent and Darwin 12 per cent to 16 per cent. But Sydney is forecast at -6 per cent to -2 per cent and Melbourne at -4 per cent to -1 per cent.
What did not change is the market’s split personality. Australia is still behaving like a set of separate housing markets, not one national cycle. Resource-linked markets and tighter supply pockets still have momentum. Higher-priced eastern capitals still carry more sensitivity to borrowing costs and sentiment. That gap has been there for a while. The downgrade just makes it harder to ignore.
Why it matters
Here’s the catch. A weaker national outlook does not automatically mean every buyer should sit out.
For some borrowers, waiting for clearer conditions sounds sensible. In practice, it can backfire. Higher rates cut borrowing capacity first. Prices do not always fall enough to compensate. If rates then ease later, borrowing power improves, but prices can move before savings catch up. That is one reason buyers who miss one window often find the next one no easier.
This is where strategy matters more than the headline. If a buyer has capacity to purchase but only enough borrowing room for one or two moves, the first purchase may be less about perfection and more about function. A faster-moving market can build equity sooner. That can matter if the second purchase is the one aimed at a longer-term hold, lower volatility or a different part of the cycle.
That does not make momentum chasing risk-free. It does mean portfolio-building and owner-occupier timing are not the same problem.
The numbers most people are missing
The part most people miss is that first-home buyers are still getting into the market, even while affordability stays under pressure.
ABS data for the December quarter of 2025 shows the number of new owner-occupier first-home buyer loan commitments rose 6.8 per cent in the quarter to 31,783, while the value of those loans rose 15.5 per cent to $19.3 billion. That is a material lift, and it cuts against the idea that aspiring buyers have simply disappeared.
So what does that mean in plain English?
It means affordability is bad, but access has not shut completely. Government support, smaller deposits, changing location choices and a willingness to compromise on dwelling type are still pulling buyers through. The market is not easy. But it is also not frozen.
That matters for investors as well. A market where first-home buyer finance is still flowing is not one where demand has vanished. It is one where demand is adapting.
Higher rates are slowing parts of the market, not killing the whole market. Buyers are becoming more selective, more price-sensitive and more dependent on finance settings, but they are still active. That keeps a floor under some segments even when sentiment weakens.
Profit buffers are doing more work than many realise
There is another support under the market that gets less attention than rate headlines: accumulated equity.
Domain said that in the second half of 2025, 97.5 per cent of house resales and 88.3 per cent of unit resales nationally delivered a profit. That suggests many existing owners still have a cushion, even if cost-of-living pressure has increased and rates stay higher for longer.
Why does that matter? Because markets usually crack hardest when owners are forced to sell into weak conditions without a buffer. Profitability this broad does not remove risk, especially for recent buyers or weaker unit pockets, but it does reduce the chance of widespread distress listings across the whole market at once.
That is one reason the current cycle looks uneven rather than uniformly weak. Expensive markets can soften. Transaction volumes can stay patchy. But broad forced selling is harder to generate when many households are still sitting on equity.
Where the pressure is building
Sydney and Melbourne remain the obvious pressure points in SQM’s downgrade. That makes sense.
These are deep markets with strong long-term demand, but they are also the markets where higher entry prices and larger loan sizes make rate changes bite faster. When finance gets tighter, the buyer pool narrows quickly. When rates eventually fall, the reverse can also happen quickly.
Perth, Brisbane, Adelaide and Darwin look different because the balance between supply, affordability and local demand is different. Some of these markets still have relative value, tighter vacancy, or less extreme price points. That does not mean they are immune. It means the hit from higher rates may be smaller or delayed.
The risk is assuming this outperformance lasts automatically. It may not.
What could derail this view
There are three obvious risks to watch.
The first is inflation. If energy prices keep feeding through to household bills and the RBA decides inflation is not under control, the rate path could stay tighter for longer than borrowers expect. SQM’s more aggressive scenario assumes the cash rate rises to 4.5 per cent or higher by the end of 2026, with weighted capital city growth slipping to -3 per cent to 1 per cent.
The second is labour market deterioration. If unemployment rises sharply or demand weakens faster than expected, rate cuts could come earlier. SQM’s more positive scenario assumes rates rise to 4.1 per cent, then begin easing later in 2026, lifting the weighted capital city outcome to 2 per cent to 7 per cent.
The third is policy. Housing markets do not move on rates alone. Tax changes, buyer incentives, credit settings and planning decisions can all shift behaviour, especially at the margin.
Bottom line
The market signal is not “Australia housing crash” and it is not “property always wins”. It is more disciplined than that.
SQM’s downgrade tells you the easy optimism from late 2025 has been pared back. Rates and inflation matter again. Expensive markets look more exposed. But buyer demand has not disappeared, first-home buyer lending is still rising, and strong equity buffers are still helping many owners absorb pressure.
