Australian families now need 50.9 per cent of their income to cover monthly mortgage repayments, according to new research from PRD, as higher interest rates and larger loan sizes put further pressure on buyers and contribute to a more cautious property market.
PRD’s Australian Economic & Property Report, Second Half 2026, identifies the figure as a peak in its housing affordability measure, with the financial strain increasingly reflected in longer selling periods, softer property prices and weakening buyer sentiment.
The report paints a challenging picture for real estate agents, particularly in markets where purchasers are reassessing their borrowing capacity and vendors are adjusting to conditions that differ markedly from those experienced in 2025.
PRD Chief Economist Dr Diaswati Mardiasmo said the combination of higher interest rates, persistent inflation and global uncertainty had fundamentally changed the outlook for Australian property.
“The 2026 air is significantly different than 2025,” Dr Mardiasmo wrote in the report.
“In the real-estate world, we are seeing this translate into longer days on market and, in some specific areas, a softening in median house/unit prices.”
According to PRD, average housing prices had declined 1.6 per cent from their March peak at the time of its analysis, with Sydney and Melbourne leading the downturn, while auction clearance rates had fallen below long-run averages.
The report also identified a deterioration in buyer sentiment, with the national Time to Buy a Dwelling Index falling 8.3 per cent over the year to October 2026, reaching 88.4 points.
Every state recorded a decline in the index, with Tasmania experiencing the largest fall of 24.7 points, followed by Victoria, down 14.7 points.
Despite the decline, Victoria retained the highest reading at 93.1 points, narrowly ahead of New South Wales at 93.0, highlighting the differences in buyer sentiment between markets.
PRD attributed the deterioration in housing affordability to successive interest rate increases and a 7.8 per cent annual rise in average loan sizes.
The report found affordability had weakened in Western Australia, Queensland, South Australia, the Northern Territory and the ACT, while New South Wales and Victoria recorded improvements as property prices softened.
For agents, the findings highlight the importance of understanding how borrowing capacity and confidence are influencing buyers at a local level, rather than assuming that the national downturn is affecting every market in the same way.
First-home buyers are also taking on larger mortgages, even as their overall participation remains relatively steady.
PRD found that the average first-home buyer loan size increased by 10 per cent over the 12 months to the June quarter of 2026, while the number of first-home buyers nationally declined marginally by 0.1 per cent.
First-home buyers accounted for 36.3 per cent of owner-occupier loans, an increase of 0.7 percentage points over the same period.
However, the national figures concealed considerable differences between states, with South Australia recording a 22.9 per cent increase in first-home buyer activity, followed by Tasmania at 9.3 per cent and New South Wales at 1.7 per cent.
PRD said the Federal Government’s 5 per cent deposit scheme had helped more first-home buyers enter the market, but warned that the increase in average loan sizes was exposing purchasers to greater financial risks in a higher interest rate environment.
The investment market is also undergoing a significant adjustment, with PRD identifying changes to negative gearing, capital gains tax and self-managed superannuation fund rules as contributing to uncertainty.
The report found investor home loan commitments had increased 12.8 per cent over a 12-month period, although it separately noted a sharp decline in investor commitments during the preceding six months.
The differing time frames suggest that investor activity has weakened more recently despite remaining above year-earlier levels on the report’s annual measure.
The Federal Government’s housing investment tax reforms, announced in the May 2026 Budget, will restrict negative gearing benefits for certain established residential investment properties from July 2027, while introducing changes to capital gains tax arrangements.
PRD said the changing investment landscape was influencing purchasing decisions and contributing to softer auction clearance rates, particularly as investors reconsidered the types of properties they intended to acquire.
Despite the pressure on borrowers, the report found that widespread mortgage distress had not emerged in the available data.
Housing loan arrears of 30 days or more and 90 days or more remained below 1.5 per cent across borrower segments, while less than 0.5 per cent of outstanding Australian home loan balances were in negative equity.
PRD also cited Reserve Bank analysis suggesting that even a 20 per cent decline in property prices would leave fewer than 1 per cent of mortgages in negative equity.
The figures provide an important distinction for agents navigating the downturn, suggesting that while buyers and existing homeowners are facing greater financial pressure, the market is not necessarily experiencing a corresponding increase in distressed property sales.
On the supply side, PRD found new residential construction increased 16.4 per cent annually in the June quarter of 2026, while dwelling investment rose 3.5 per cent over the year to the March quarter.
However, construction costs remain a significant obstacle to delivering additional housing, with new dwelling cost inflation reaching 5.3 per cent over the year to June.
The report said the increase in construction activity was encouraging but warned that Australia continued to face a substantial housing supply backlog dating back to before the pandemic.
Looking ahead, PRD expects interest rates to remain elevated for the remainder of 2026, with the possibility of easing in the middle to latter part of 2027, depending on inflation.
It also forecasts inflation gradually returning towards the Reserve Bank’s target range, reaching 2.5 per cent by early 2028.
However, Dr Mardiasmo cautioned against interpreting the changing property market as a uniform national downturn, arguing that opportunities would continue to emerge for buyers and investors who understood their local conditions.
“That said, this is likely to be a period of adjustment rather than a one-size-fits-all. Different markets, suburbs and property types will respond in different ways,” she wrote.
“Buyer cohorts will also respond differently.”
With buyer confidence weakening and affordability remaining stretched, the report suggests agents will increasingly need to rely on suburb-level evidence, realistic pricing and a clear understanding of individual buyer circumstances to navigate the changing market.
Dr Mardiasmo said decisions should be guided by local market conditions and personal financial circumstances rather than broader market headlines.
“Now is not the time to follow trends or headlines. Together, let’s cut through the noise.”