Borrowing capacity has taken a big hit due to interest rate rises

Home buyers hoping for a meaningful housing correction under the proposed Budget tax shake up may be disappointed, according to leading comparison platform Canstar.

New forecasts suggest only Sydney and Melbourne property prices are likely to record declines this year.

Canstar’s analysis of Westpac’s latest property price forecast shows the median-priced house in Sydney could fall a further $29,601 through to the end of this year

And the median house price in Melbourne could drop by a further $18,128, based on figures from leading data experts Cotality.

Perth and Brisbane are expected to continue to power ahead, under the Westpac forecast, despite the three cash rate hikes and the federal government’s tax reforms, with house prices tipped to rise by around $39,000 and $32,000 respectively by the end of the year, Canstar said.

Sydney’s median house price has already fallen $18,977 in the first four months of 2026, according to Cotality data, however many home buying budgets have shrunk by even more.

Canstar analysis shows that a single person earning the average full-time wage, as recorded by the ABS, has already seen their maximum borrowing capacity drop by $35,800 as a result of the rate hikes, while a couple has seen their maximum budget drop by $71,600.

However, if there are two more 0.25 per cent cash rate hikes to come this year, as forecast by Westpac, then that same person’s borrowing capacity could shrink by around $57,600, wiping out 10 per cent of their buying budget since the start of the year. 

One limiting factor in how much a person can borrow from the bank is the stress test APRA makes banks apply to new mortgage applications to make sure the new borrower can withstand higher rates. 

Currently the stress test is three percentage points with the regulator confirming this week it will maintain the buffer at this setting, despite the higher-rate environment, with APRA noting that housing credit growth remained robust despite the rate hikes.

Canstar’s data insights director Sally Tindall said: “Changes to negative gearing and capital gains tax risk pushing Sydney and Melbourne house prices even further into reverse. However, it’s unlikely to fall by as much as many first home buyers are hoping.”

“Westpac’s forecast of a continued drop in Sydney and Melbourne prices through to the end of the year might be psychologically significant but numerically they’re ultimately pretty modest.

“With Sydney’s median house price still hovering at $1.6 million, a further $30,000 drop is still closer to a rounding error than a saving.”

Meanwhile, Perth and Brisbane continue to show remarkable resilience and are expected to continue on this trajectory.

“Even with three rate hikes in 2026 and two more potentially on the horizon, these cities are still expected to add $32,000 to $39,000 to their median house prices by year-end, based on Westpac’s forecast.” Tindall said.

“Three rate hikes in quick succession have already taken a serious bite out of borrowing capacity, particularly in Sydney where buyers need to borrow significantly more just to get a foot in the door.

“Modest property price declines don’t necessarily improve affordability when higher mortgage rates are stripping tens of thousands of dollars from buyers’ budgets.

“Anyone hoping APRA might throw borrowers a lifeline by reducing the serviceability buffer will be disappointed.

“The three percentage point buffer has become an increasingly tough hurdle in a higher-rate environment because borrowers are now being assessed at rates pushing well above nine per cent. 

“However, lifting the buffer would more than likely lift property prices, which is the last thing most would-be first home buyers want.”