Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Property is the asset class most Australians know best and, at present, the one sending the most mixed signals. House prices are softening in Sydney and Melbourne, rents remain elevated, commercial property is diverging sharply by sector and the tax reforms announced in the May budget are beginning to reshape investment decisions in real time. For investors with property exposure, or those considering it, the picture heading into 2027 deserves careful examination.

The Residential Market

The RBA has now hiked rates three times in 2026, bringing the cash rate to 4.35%, while ANZ and Westpac are forecasting one further increase to 4.85% at the November meeting. That trajectory is doing what higher rates are designed to do: cooling demand and compressing borrowing capacity.

Sydney and Melbourne housing prices are below October 2025 levels, with properties in the top quartile of both markets declining for five consecutive months. ANZ Research expects small falls in housing prices across both cities through the remainder of 2026. KPMG now forecasts national house values to decline by 1.1% for the full year, while unit prices are expected to rise 2.2%, reflecting a shift toward more affordable housing stock as buyers adjust to higher borrowing costs.

The regional picture tells a different story. Perth, Brisbane and Adelaide remain undersupplied, supporting prices despite rising rates, though declining borrowing capacity and weaker confidence will gradually impact these markets as well. The divergence between capital cities reflects how deeply the current cycle is driven by affordability constraints rather than broad demand collapse.

The May budget adds a further layer of complexity. Commonwealth Bank estimates the negative gearing and CGT changes leave prices approximately 3% lower than they would otherwise have been, and has cut its forecast for dwelling price growth to December 2026 to 3% from 5%. Investor activity in established residential property has softened measurably since budget night, with the restricted negative gearing rules now in effect for new purchases.

The Rental Market

Despite the softening in prices, rental conditions remain acutely tight. Vacancy rates across most capital cities sit well below 2%, population growth continues to run ahead of dwelling completions and construction costs remain approximately 40% above pre-pandemic levels, constraining new supply. Housing undersupply and migration-led population growth are expected to sustain rental growth and support increased institutional capital deployment across the living sector through 2026 and 2027.

For renters, the outlook offers little immediate relief. For investors holding existing residential property, strong rental yields and low vacancy provide a meaningful income offset against the capital value pressure from higher rates.

Commercial Property

The budget's decision to exempt commercial property from negative gearing restrictions has created a direct incentive for investor capital to rotate from established residential into commercial assets. That rotation is now visible in transaction activity and valuations.

Industrial and logistics assets remain well supported despite some moderation in rental growth as new supply comes online, while retail property is outperforming expectations, with constrained supply, steady foot traffic and rental growth making it one of the standout performers of 2026. Purpose-built student accommodation, co-living and living sector assets are emerging as legitimate institutional categories as investors recognise the structural undersupply in housing and the defensive income these assets deliver.

Offices are more nuanced. A sharp slowdown in new supply, alongside recovering occupier demand, is driving vacancy lower and supporting stronger effective rental growth across premium office assets through 2026 and 2028. Perth in particular enters the next phase with no new supply pipeline, creating conditions for accelerating rents in quality assets.

For ASX investors, the listed REIT sector provides liquid exposure across these themes. Goodman Group, Scentre Group, GPT Group and Mirvac each offer differentiated exposure to industrial, retail, diversified and residential development respectively.

The BPC View

Higher rates, budget-driven tax changes and the divergence between residential and commercial property have created a more complex environment than the one investors navigated through 2024 and 2025.

The structural case for Australian property remains intact. Population growth, chronic undersupply and a rental market under sustained pressure all support long-term values. The question for investors is not whether property is a sound asset class, but where within it the risk-adjusted opportunity is most compelling right now. On current settings, that answer points increasingly toward commercial over established residential, quality over volume, and income over capital growth as the primary return driver heading into 2027.

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