The red-hot Australian housing market is showing the first signs of easing since interest rates started rising back in May 2022.

Tim Lawless, Cotality's research director, said the softening hinted at a weaker start to housing trends in 2026.

"Renewed speculation that the rate-cutting cycle is over and the next move from the RBA could be a hike has dented housing confidence," he said.

A "higher for longer" setting on interest rates, mixed with cost-of-living pressures and worsening housing affordability, "looks to have taken some heat out of the market", he said.

Nationally, December saw the smallest monthly increase in house prices in five months, up just 0.7 per cent.

Sydney and Melbourne property markets went backwards by 0.1 per cent in December for the first time since January last year.

Tim Lawless says the Sydney and Melbourne housing markets had been "losing momentum" leading into the end of the year.  (ABC News: Nickoles Coleman)

"It's been a little while since we've seen a negative movement," said Mr Lawless. However, he was not surprised because both markets were "losing momentum" leading into the end of last year. 

"I think that's a real reflection of … particularly for Sydney, [the] affordability constraints," he said.

While he does not expect dramatic falls, Mr Lawless expects the property market weakness in Sydney and Melbourne to continue this year.

"I don't think this is a blip," he said.

"But I'd be very surprised if we saw a pace of growth across most markets that was as fast as 2025."

Numbers across the country

Despite the softer December outcome, Cotality's Home Value Index (HVI) surged 8.6 per cent in 2025, adding roughly $71,400 to the national median dwelling value.

It is the strongest calendar year gain in home values since 2021, when the market spiked 24.5 per cent amid record-low interest rates and record-high levels of purchasing activity.

Cotality's Home Value Index (HVI) surged 8.6 per cent in 2025, adding roughly $71,400 to the national median dwelling value. (ABC News: Keana Naughton)

In terms of capital city price growth in December, it was a mixed picture.

• Adelaide and Perth saw the strongest gains, both up 1.9 per cent.
• Darwin and Brisbane each gained 1.6 per cent.
• Hobart prices rose 0.9 per cent.
• Canberra rose just 0.2 per cent.

Economists point to several underlying factors supporting the demand.

"If you have a look at anything priced under around a million dollars, the 5 per cent deposit scheme is really accelerating growth at that price point," Ray White chief economist Nerida Conisbee said.

Ray White chief economist Nerida Conisbee says the five per cent deposit scheme is accelerating growth for homes priced under a million dollars. (Supplied: Nerida Conisbee)

Pockets of relatively affordable housing remain scattered across the country, according to Ms Conisbee.

"We still have markets like Perth, which are continuing to see very strong growth, and also in South-East Queensland," she said.

She also pointed to Adelaide and Hobart as cheaper capital cities, "though Melbourne is probably the one where we are seeing the most affordable options", she said.

"There are a lot of low-cost apartments in Melbourne … they have managed to build a lot of homes at quite a low cost, which has kept things much more affordable."

Sydney remains largely unaffordable for those on average incomes, with a median house price of $1.5 million.

Combined capital cities have a median dwelling price of $991,331 and a combined regional dwelling price of $734,351.

Nationally, the median dwelling price is $901,257.

"It is getting really, really hard for young people to get into that market," Ms Conisbee said.

Interest rates to influence market 

While some areas across the country are expected to see stronger property price growth in 2026, the direction of interest rates is likely to influence the broader picture.

"The market is expected to be much more subdued in 2026 and it will, of course, depend a lot on what happens to interest rates," Ms Conisbee said.

At this point in time, she does not expect interest rates to fall.

"They may increase and that will definitely keep a cap on price growth," she said.

Mr Lawless has a similar view.

"I think we probably will see less demand-side pressures partly just due to affordability constraints," he said.

"And then you've simply just got this tighter credit environment or at least the first signs of it."

He is referring to the banking regulator, which has announced tougher restrictions on home loans from next month to limit the number of "high-risk" large loans being issued to customers.

It means only 20 per cent of all new loans approved can have the total amount borrowed at more than six times the borrower's annual household income. 

Mr Lawless, however, does not see dwelling price growth contracting any time soon.

"We've got these opposing forces still ongoing … listings are really low for established homes and we're not building enough homes either," he said.

Real estate agent Jordon Le Breux says he does not expect any major moves in the housing market this year. (Supplied: Jordon Le Breux)

Some real estate agents might be a little more hopeful, including Jordon Le Breux, who said as long as interest rates remained unchanged, he did not expect any major moves in the housing market.

"I don't think it's going to boom, but I don't think it's going to drop. I think it's just going to be very steady," he said.

"As long as the interest rates are steady, the market will stay the same."