City home buyers head to the regions as property prices climb

Aspiring home buyers are heading to the regions as falling interest rates and limited supply drives city house prices up.

The median house price in Sydney is set to approach $2 million in 2026, according to forecasts released by property sales portal Domain on Thursday.

House prices across the capital cities are expected to grow by 6 per cent in 2026.

That is on top of the 9 per cent growth forecast for 2025, with three Reserve Bank interest rate cuts and stronger income growth boosting demand.

"We've seen momentum building across our housing markets, and particularly in our largest markets Sydney and Melbourne," Domain chief economist Nicola Powell said. "We're expecting that momentum to continue to build in the first half of 2026."

After falling in recent years, the median Melbourne house price is expected to grow six per cent to a record of $1,170,168 in 2026.

The median Sydney house price is forecast to rise seven per cent to $1,924,439, putting it on track to eclipse $2 million in 2027.

Buyers head to regional centres

As prices surge in the cities, buyers in the regions have been feeling the spillover effects.

Regional dwelling values rose 2.4 per cent in the three months to October 31, the highest growth rate in more than three years, property analytics firm Cotality found.

While the spike in regional property prices at the height of the COVID-19 pandemic was driven by factors such as remote work and a desire for more space, the current growth is being driven by prospective buyers that find themselves priced out of capital city markets.

Housing supply predicted to improve

Governments have in recent years worked to improve housing affordability by increasing supply, such as NSW recently passing planning and zoning reforms. 

While it would take time for such changes to bear fruit, Australia's chronic undersupply would start to improve from late 2026, Dr Powell said.

Unit prices are expected to grow by a more modest 5 per cent nationwide in 2026, but rents are expected to start rising after a period of near-stagnant growth in 2025.

Falling overseas migration and increased investor activity should at least keep rental growth under control, at a relatively subdued 3 per cent.