If you’ve been reading the headlines this week, you’re likely seeing a tale of two markets. On one hand, Sydney and Melbourne are looking soft, with price growth stalling or barely inching forward. On the other, cities like Perth, Adelaide, and regional markets are continuing to post aggressive gains.

As investors, we need to look past the headline "national growth" figures and understand the mechanics driving this divergence. The latest reports from January 2026 reveal a clear trend: the market isn't stopping; it's just moving. Specifically, it is moving down the affordability curve.

Regardless of what the Reserve Bank does next, Australians are still buying property. But what they are buying is changing rapidly, driven by the collision of monetary policy and government incentives in the sub-$1 million market.

The "Rate Reality" Check

Let's address the elephant in the room. Despite hopes for relief, inflation in the second half of 2025 came in stronger than expected, and a rate rise at the RBA’s February meeting is now looking likely. PropTrack notes that while 2025 growth was supported by rate cuts, the possibility of further hikes is weighing on the market.

Cotality’s data reinforces this, noting that affordability and serviceability constraints are acute, with interest rates sitting a full percentage point above the pre-COVID decade average.

Conventional wisdom suggests that when rates rise (or stay high), buyers disappear. That is wrong. Buyers don't disappear; their borrowing capacity simply shrinks. A buyer who could afford $1.5 million last year might now be capped at $950,000. They don't exit the market; they just change their search parameters.

Moving Down the Curve

This compression of borrowing capacity is forcing demand into more affordable price brackets. This is why we are seeing a disconnect between the premium markets and the sub-$1 million markets.

  • The Top End is Stalling: Sydney and Melbourne have seen growth soften significantly. Melbourne prices have declined for three consecutive months, and Sydney is only recording marginal gains of roughly 0.1% to 0.2%. Ample choice for buyers in these expensive cities is dampening price growth.

  • The Affordable Markets are Booming: In stark contrast, markets that offer price points below the national median are outperforming. Adelaide jumped a brisk 0.9% in January alone , while Perth surged 2.0% according to Cotality’s index.

As Cotality’s research director Tim Lawless points out, there is a trend of "stronger growth conditions at lower price points," supported by intense competition for affordable houses. This is where the mainstream demand is now concentrating.

The Policy Effect: Accelerating the Sub-$1M Demand

It is not just interest rates pushing people into this bracket; it is government policy.

State and federal "First Home Buyer" (FHB) schemes are acting as a floor for prices in the sub-$1 million segment. These incentives remain supportive for eligible buyers, effectively "channeling demand into the lower quartile of the market".

Even when broader demand softens, these government incentives amplify competition in the mid-range to entry-level segments. When you combine an investor chasing yield with a First Home Buyer armed with government grants, you create a high-pressure environment in that $600k–$900k price band.

Why We Are Bullish on Affordable Corridors

The data tells us that waiting for interest rates to drop before buying is a flawed strategy. Demand is resilient because unemployment remains very low. People have jobs, they have income, and they want to buy homes.

However, "borrowing power" is the new "location."

Investors should be looking at markets that service this "displaced demand", areas where a family can still buy a detached home for under $1 million. This includes:

Adelaide & Perth: Still offering comparative affordability and recording 13.8% and 17.5% annual growth respectively.

Regional Markets: Regional areas posted larger monthly gains (+0.3%) than the combined capitals in January , with Cotality recording a 1.0% jump for combined regionals.

The Verdict

The market is adapting, not crashing. We are seeing a "flight to affordability." As credit conditions tighten, the smart money is moving down the curve, targeting assets that fall within the sweet spot of FHB incentives and revised borrowing capacities.

The buyers are there. They’re just looking at a different price tag.