Home prices are falling in Australia’s two largest cities as high interest rates and investor tax changes put pressure on an already soft market.

Dwelling values fell 0.9 per cent in Sydney, 0.8 per cent in Melbourne and 0.2 per cent in the ACT during May, according to data released by research agency Cotality on Monday.

While prices rose in other state and territory capitals, the growth was weaker than previously seen.

Cotality research director Tim Lawless said some of the weakness was part of the regular housing price cycle, but there were also other factors.

“Late last year it was more about affordability and serviceability challenges as housing prices were outpacing incomes,” he said.

“Then, towards the end of last year, we started to see inflation accelerating, the RBA taking a more hawkish stance — that was a blow to confidence — and from there we saw interest rates starting to rise, global oil shock and now a budget has been handed down.”

Perth and Darwin posted the strongest monthly price increases at 1.5 per cent, followed by Brisbane and Hobart at 0.9 per cent and Adelaide at 0.5 per cent.

Sydney’s median dwelling price stands at $1,282,020. In Melbourne, it is $812,621.

Price growth was stronger outside the capital cities, with regional Western Australia leading the way at 1.9 per cent in May and 22.7 per cent annually.

Across the country, rents rose 0.6 per cent in May, which was the same as in April but slightly down on the first three months of 2026.

A very low national vacancy rate of 1.5 per cent — meaning demand for rental properties is high — was likely to keep pushing up rents in coming months, Cotality warned.

Lawless said the federal government’s decision to restrict key investor incentives to new homes would likely slow their spending, but it was too early to see any significant impacts in the national data.

“Looking forward, absolutely we expect there to be less investment in the housing market and we’ll see a pullback in overall transactional activity,” he said.

Auction clearance rates — considered a useful leading indicator for future property price rises — have reached a “new cyclical low” following the announcement of the tax changes, according to separate Cotality data.

-AAP