How the Budget shifted the advantage from cheaper to more expensive homes

For most of the past year, cheaper homes were outperforming expensive ones across every capital city. The Budget landed in May. By September, the relationship between the two had completely reversed.

For much of the past year, Australia’s more affordable properties have been outperforming the expensive end of the market. That has now changed. Since the Federal Budget in May, higher-priced homes have started holding their value better, while cheaper properties have been experiencing sharper declines.

The reversal is particularly interesting given how strongly government policy had previously supported the affordable end. The expansion of the 5% deposit scheme in October 2025 brought more first home buyers into the market. With lower deposit requirements, no income limits and higher property price caps, more buyers were able to purchase sooner. This created additional demand, particularly for cheaper houses and apartments.

As a result, by the start of 2026 the affordable end was outperforming, even as more expensive properties were already starting to decline as interest rates started to increase.

Our analysis compares the 25th and 75th percentile of property values across eight capital cities. In January, cheaper houses were outperforming more expensive houses by an average of 1.3 percentage points over three months. For units, the advantage was similarly strong.

By September, this had completely reversed. More expensive houses were outperforming by 0.18 percentage points, while the advantage for higher-priced units was 0.32 percentage points.

This doesn’t mean expensive homes are suddenly booming. Prices are generally weakening across the market. What has changed is that cheaper properties are now falling faster. The main driver of this is the Budget’s changes to negative gearing and capital gains tax and the subsequent withdrawal of investors.

Property investors have traditionally concentrated heavily on the affordable end of the established housing market. These properties generally offer lower entry prices and attractive rental yields, making them particularly appealing to investors.

The Budget substantially reduced the tax advantages of purchasing established investment properties after 12 May. This has already changed the financial attractiveness of buying an investment property. The result has been a withdrawal of investor demand from precisely the market segment that had previously benefited from strong first home buyer activity.

Higher interest rates have added to the slowdown, but the Budget changes help explain why the relative performance of cheaper and more expensive properties has shifted so dramatically.

For first home buyers, it creates a dilemma. Before purchasing, they understandably want prices to be as affordable as possible. Reducing investor competition can help them enter the market, particularly when combined with the 5% deposit scheme. But once they have purchased, their priorities change. Like every other homeowner, they want their property to increase in value. And this is where the longer-term consequences become more complicated.

Investors are unlikely to return quickly. My earlier analysis found that rental yields would need to increase from around 3.95 per cent to 5.15 per cent to compensate for the Budget changes. This would require rents to rise by approximately 30 per cent, property prices to fall by 23 per cent, or some combination of the two. Until that happens, cheaper properties are likely to continue underperforming, even when the broader market recovers.