Sydney’s affordable housing markets are expected to hold up better than their more expensive counterparts over the next six months, even as house prices continue to fall across parts of the city.
Shore Financial’s latest State of Sydney Report – September 2026 has identified the suburbs best placed to outperform across five different price brackets, with its modelling suggesting reduced borrowing capacity is now exerting enough pressure on the market to outweigh even extremely tight housing supply.
The half-yearly report analyses more than 600 Sydney suburbs, dividing them into five price categories: Heartland Sydney, Suburban Sydney, Rising Sydney, Professional Sydney and Affluent Sydney, before identifying five suburbs in each bracket considered best placed over the coming six months.
The forecasts are based on a proprietary machine-learning formula analysing movements in inventory levels, days on market and asking prices over the previous 24 months.
Data used in the report comes from property research consultancy Suburbtrends and the Australian Bureau of Statistics.
At the affordable end, Hebersham in Western Sydney emerged as the leading Heartland Sydney suburb, with house prices forecast to ease by just 1–2 per cent over the six months to February 2027.
Milperra was the leading suburb in the Suburban Sydney category and is forecast to decline by 5–6 per cent, while Petersham topped Rising Sydney despite prices being forecast to fall 4–5 per cent.
At the higher end, Lilyfield led the Professional Sydney category but is expected to record a 6–7 per cent fall, while Bondi Beach was the leading Affluent Sydney suburb with prices forecast to decline 3–4 per cent.
Importantly, the rankings do not mean the suburbs are necessarily expected to record price growth. Rather, Shore Financial’s modelling indicates they are likely to outperform other suburbs within their respective price brackets.
Supply remains exceptionally constrained in several of the markets. Petersham has just one month of housing stock available, while Lilyfield and Bondi Beach both have less than one month.
Shore Financial chief executive Theo Chambers said the competing forces of constrained supply and reduced borrowing capacity were shaping Sydney’s market.
“Some of the suburbs in this report have less than one month of housing inventory, which would normally put significant upward pressure on prices. But even in those markets, we’re forecasting price falls,” Mr Chambers said.
“That tells you how powerful the other force has become. Buyers simply can’t borrow as much as they could before the Reserve Bank started raising rates again.
“Tight supply is cushioning the downturn – without it, prices would probably be falling more sharply – but right now it isn’t strong enough to overcome the reduction in borrowing capacity.”
The report comes after the Reserve Bank lifted rates by a combined 0.75 percentage points during the first half of 2026, followed by two consecutive holds, significantly changing borrowing conditions for Sydney buyers.
“The Reserve Bank has now moved to a mildly restrictive setting and we’re seeing the effects flow through the property market. Higher mortgage rates have reduced borrowing capacity, which means buyers simply can’t bid as aggressively as they could before,” Mr Chambers said.
He said there were signs the higher-rate environment was beginning to have its intended effect, pointing to headline inflation falling from 3.8 per cent in June to 3.5 per cent in July and unemployment increasing from 4.1 per cent in January to 4.5 per cent in July.
However, Mr Chambers said inflation remained a challenge, with trimmed-mean inflation at 3.6 per cent in July and remaining above the Reserve Bank’s 2–3 per cent target range.
“So while the softer jobs market and improvement in headline inflation have reduced the near-term risk of another rate rise, the Reserve Bank still has a tightening bias and another increase can’t be ruled out,” he said.
The outlook could change if interest rates begin falling next year, with Shore Financial expecting Sydney’s more affordable markets to be among the earliest beneficiaries of improved borrowing capacity.
“Looking further ahead, rates may start falling in 2027 if inflation continues moving in the right direction. When that eventually happens, I’d expect the more affordable, higher-yielding parts of Sydney to be among the first to respond,” he said.
“Those markets are already proving more resilient because buyers need smaller loans, while investors can benefit from stronger rental yields. If borrowing capacity eventually starts increasing again, those fundamentals should put the affordable end of the market in a strong position.”
Buyer sentiment is also playing a role, according to Mr Chambers, with uncertainty causing some purchasers to delay decisions despite the limited supply of properties.
He said the conditions could nevertheless favour buyers prepared to transact, particularly those moving up the property ladder.
“But that uncertainty can create significant opportunities for those willing to act – particularly upsizers. The discount they can negotiate on a more expensive purchase may substantially outweigh any discount they need to accept when selling their existing property,” he said.
For buyers more broadly, Mr Chambers said current conditions offered greater choice and less competition than Sydney had experienced in recent years.
“For buyers, this remains the most workable market we’ve seen in years. There is more choice, less competition at auction and more time to do proper due diligence.
“But Sydney is made up of scores of distinct local markets, so buyers still need to focus on the fundamentals of individual suburbs rather than the city-wide headlines.”