Australia's housing market is doing two things at once. Cotality's July 2026 Home Value Index shows national dwelling values fell 0.7% in a month, the largest single-month drop since December 2022, yet over the same three months the cheapest quarter of the market gained value.
This two-speed property market has been building all year. An expanded federal deposit scheme is funnelling first home buyer demand into the bottom price tier while budget tax changes pull investors out of the top. If you are buying your first home in 2026, the tier you shop in matters far more than the national headline.
One market, two directions
Start with the headline numbers, because they hide the story. Cotality (formerly CoreLogic) recorded falls in four of the five largest capitals in July, and Cotality data reported by Reuters leaves Sydney and Melbourne more than 5% below their recent peaks. Over the three months to July, national values fell 1.9%, the largest three-month decline since December 2022.
The regions have joined in too. The combined regionals index slipped 0.2% in July, its first monthly fall since January 2023, with regional NSW, Victoria and Queensland all easing while regional South Australia (up 1.4%) and regional WA (up 0.9%) kept climbing.
| Market | July 2026 change (Cotality Home Value Index) |
|---|---|
| Sydney | down 1.4% |
| Melbourne | down 1.2% |
| Brisbane | down 0.6% |
| Adelaide | down 0.2% |
| Perth | up 0.1% |
| Combined regionals | down 0.2% |
The quartile split underneath
Now the part that matters for buyers at the affordable end. The same Cotality release shows upper quartile values, the most expensive 25% of the market, fell 3.2% nationally over the three months to July, while the lower price tier rose 0.3%. That is what a two-speed market looks like: a three and a half percentage point gap between top and bottom in a single quarter.
It has run this way for most of 2026: Cotality tier data to March, reported by MacroBusiness, showed the cheapest quartile growing fastest in every major capital while the most expensive trailed everywhere except the ACT.
Why the cheap end keeps rising
A deposit scheme with no brakes on demand
On 1 October 2025 the federal government expanded the First Home Guarantee into what Housing Australia now brands the Australian Government 5% Deposit Scheme. Income caps and the annual limit on places were scrapped, and property price caps rose sharply. Any eligible first home buyer with a 5% deposit can use it and pay no Lenders Mortgage Insurance. The mechanics are unpacked in our First Home Guarantee explainer; what matters for prices is where the caps sit.
| State | Capital city and regional centres | Rest of state |
|---|---|---|
| New South Wales | $1,500,000 | $800,000 |
| Victoria | $950,000 | $650,000 |
| Queensland | $1,000,000 | $700,000 |
| Western Australia | $850,000 | $600,000 |
| South Australia | $900,000 | $500,000 |
| Tasmania | $700,000 | $550,000 |
The regional centre column covers more than you might expect: Newcastle and Lake Macquarie, the Central Coast, the Illawarra, the Mid North Coast, Richmond-Tweed and Coffs Harbour-Grafton in NSW; Geelong in Victoria; the Gold Coast and Sunshine Coast in Queensland. The ACT runs a single $1,000,000 cap, and the Northern Territory sits at $750,000 in Darwin and $600,000 elsewhere in the territory. Check your exact postcode with the search tool on firsthomebuyers.gov.au before you rely on a figure.
Every scheme buyer shops at or under these caps, and in the big states those caps sit squarely over each city's affordable stock. Funnel an uncapped stream of 5% deposit buyers under the same ceilings and that stock gets bid up. The lending data shows it. ABS lending indicators recorded a 6.8% jump in first home buyer loans to 31,783 in the December quarter 2025, the first full quarter of the expanded scheme, with the average loan size up 8.5% to $607,624.
Housing Australia reported in March 2026 that more than 300,000 Australians had bought or built with the scheme's support since 2020, and Domain's forecast estimated the expanded version alone could add 3.5% to 6.6% to prices in its first year.
Affordability ceilings push everyone down-market
The scheme is not the only force pressing demand toward the bottom. Borrowing capacity does the same job quietly. Rates and serviceability buffers mean buyers who would have shopped a bracket higher a few years ago now qualify for less and search lower. Upgraders, downsizers and priced-out house hunters all end up in the tier the scheme is already heating.
Sitting the fight out as a renter is not free either. Cotality puts national rents up 5.9% over the year to June 2026, with vacancy at 1.6% against a decade average of 2.5%. Every rent rise nudges more tenants to attempt the jump to ownership, and they land in the same entry-level tier.
Why the top end is falling
The May budget changed the investor maths
The federal budget handed down on 12 May 2026 rewired the two tax settings that have underpinned investment in established housing for decades. From 1 July 2027, negative gearing is limited to new builds. Investors who bought established homes after budget night can only deduct rental losses against rental income or carry them forward, not against a salary. Existing holdings are grandfathered. The 50% capital gains tax discount is also being replaced from the same date with an inflation-based discount and a minimum 30% tax on gains, while new builds keep access to the old discount.
Run a leveraged established purchase through those settings. Gross rental yields across the combined capitals sit near 3.5% on Cotality's June figures, against investor mortgage rates around 6.4%. That gap was tolerable when the annual loss trimmed your salary tax and the eventual gain came half taxed. With neither on offer, the case thins out fast. Investor lending had already cooled before budget night: ABS data shows new investor loan commitments fell 5.3% over the March quarter 2026.
More stock, fewer bidders where it hurts
Supply has flipped at the same time. Cotality counts total capital city listings 5.7% above the five-year average, and auction clearance rates have held below 50% since late May 2026. The pain lands hardest in expensive suburbs, where the buyer pool leans on discretionary upgraders and leveraged investors, the groups now sitting on their hands. The bottom of the market has the opposite problem: an assisted stream of buyers and not enough stock under the caps to soak them up.
What the split means for first home buyers
More competition exactly where you shop
A falling headline does not help you when everything you can afford sits in the rising tier. Clearance under 50% describes the whole market. The Saturday open for a well-priced unit or townhouse under the cap can still be packed. The scheme removed the queue for guarantee places; it cannot remove the queue at the front gate.
When help moves faster than value
Concentrated assistance has a second-order effect: prices at the assisted price points can run ahead of underlying value. If entry stock gains 0.3% in a quarter while the broad market sheds 1.9%, part of that difference is scheme-driven demand rather than fundamentals. And a 5% deposit means starting with 95% debt, so overpaying in a hot pocket leaves almost no equity buffer if it cools once the stimulus washes through. None of this makes the guarantee a bad deal: it gets buyers in years earlier and deletes the LMI bill. It is just not an excuse to pay whatever it takes.
The case for stretching up a bracket
Here is the angle most buyers miss. If your borrowing capacity clears the entry tier comfortably, the falling segments are becoming better value. Upper quartile values are down 3.2% in three months, and vendors above the caps are negotiating in a way entry-level vendors simply are not. Stretching one bracket up, or shopping just above the cap where scheme buyers cannot follow, can buy more home for less premium. A mortgage broker can tell you quickly whether your capacity genuinely supports it, since the bigger loan has to stay serviceable if rates move.
Strategies for a two-speed market
Pool resources instead of going it alone
Co-buying with family or friends pools deposits and borrowing power, which can lift you out of the most crowded tier. The government's Help to Buy shared equity scheme attacks the same problem differently, shrinking the loan rather than the deposit. Each carries rules and trade-offs, but each puts you in a different, less crowded contest.
Pick targets the crowd overlooks
Detached houses under the caps carry the most heat, so look where the pressure is lower. Units and townhouses usually sit further beneath the ceiling and attract fewer bidders per listing. Regional markets need care in 2026: NSW, Victoria and Queensland regions are easing while SA and WA still climb, so the negotiating room sits in the eastern states' commutable centres. Rentvesting, renting where you want to live while buying where the numbers work, is another way to sidestep the heaviest competition. Wherever you land, stamp duty concessions differ sharply by state and can stack with the federal scheme, so price the whole package.
Buy now with 5% or keep saving?
In the rising tier, waiting is expensive. Entry prices climbing while you save is exactly the treadmill that makes a 20% deposit recede, the problem our piece on the $168,000 deposit reality puts numbers on. The calculation flips if the home you want sits in a falling segment, where another year of saving may coincide with a lower price and a fatter buffer. The honest question is which speed your target segment is travelling at, not what the national index did.
Negotiate like it is a downturn, because above the caps it is
In the middle and upper tiers, elevated listings and clearance under 50% hand buyers leverage they have not held since 2022. Offers under the guide, longer settlements and full building and pest conditions are all live again. Our companion guide to buying in a falling market walks through the tactics. If you would rather hand off the hunt and the negotiation, a buyer's agent matched through GoMatch does this daily and knows which vendors are genuinely ready to meet the market.
FAQ: the two-speed market in practice
Why are cheap homes rising while expensive homes fall?
Demand is being steered to the bottom and drained from the top. The uncapped 5% Deposit Scheme concentrates first home buyers under set price caps, while budget changes to negative gearing and the CGT discount have thinned out investors above them. Cotality's July 2026 data shows the result: upper quartile values down 3.2% over three months while the lower tier rose 0.3%.
Will the 5% Deposit Scheme keep pushing entry-level prices up?
The settings point that way: places are unlimited, income caps are gone, and ABS data showed first home buyer lending jumping the moment the expansion started. Domain's forecast put the scheme's first-year price impact at 3.5% to 6.6% on its own. A broader downturn or a wave of new listings under the caps would ease the pressure; neither is scheduled.
Do the budget's negative gearing and CGT changes affect owner-occupiers?
Not directly. The family home stays exempt from capital gains tax, and negative gearing never applied to owner-occupiers. The changes target investors who bought established property after 12 May 2026 and take effect from 1 July 2027. The indirect effect mostly helps you: fewer investors at auctions, though the retreat is strongest in tiers above typical entry stock.
Is buying with a 5% deposit risky in this market?
It carries more risk than a 20% purchase: you start with about 95% debt and a thin equity buffer, in the one tier where scheme demand may be inflating prices. It also puts a key in your hand years before a 20% deposit would, with no LMI on top. It is manageable if you buy quality stock at a defensible price and can hold through a flat patch, and dangerous if you pay anything to win a crowded auction.
Where this leaves you
A national index falling 0.7% in a month says almost nothing about the home you are trying to buy. Australia in 2026 is running two markets side by side: one held up by the biggest first home buyer intervention in decades, one repricing as investors digest a new tax regime. Work out which market your target belongs to, then behave accordingly. In the rising tier, set a walk-away price and refuse to pay a scheme premium for an ordinary property. In the falling tiers, negotiate as hard as the data says you can.
This is general information, not financial or tax advice. Figures were checked against Cotality, the ABS, Housing Australia and federal budget papers in early August 2026, and price caps, tax settings and market data all move, so confirm current details before you act.
Sources
- Cotality, Home Value Index July 2026, "Australia's housing market downturn widens", August 2026.
- Kusher Consulting, "Home values continue to slide in July" (analysis of Cotality HVI), August 2026.
- Reuters, "Australia's home price retreat gathers pace in July, Cotality data shows", August 2026.
- Cotality, Quarterly Rental Review and rental market data, June quarter 2026.
- firsthomebuyers.gov.au, Australian Government 5% Deposit Scheme, property price caps, August 2026.
- Housing Australia, "Unlimited places, higher property price caps for first home buyers from 1 October 2025", 2025.
- Australian Bureau of Statistics, Lending Indicators, December quarter 2025 ("First home buyer loans rise by 6.8 per cent", February 2026) and March quarter 2026 (May 2026).
- Australian Government, Budget 2026-27, tax reform: negative gearing and capital gains tax, May 2026.
- The Adviser, "5% Deposit Scheme tops 300,000 buyers" (Housing Australia data), March 2026.
- Domain Forecast Report 2026 estimate, as reported by Property Update, "Australia's housing market in 2026", 2026.
- MacroBusiness, "New data shows how the 5% deposit scheme inflated home prices" (Cotality tier data to March 2026), April 2026.
