Why first home buyers and investors will go head-to-head in 2026

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Competition between first home buyers and investors for entry-level properties is set to be a defining feature of the market this year, according to experts.

But for cash-strapped young Aussies, the prospect of an interest rate rise may prevent them from competing for property at all.

The prospect of an interest rate rise may put further pressure on first home buyers.

Cotality executive research director Tim Lawless said property price growth had already cancelled out the benefits of three interest rate cuts in 2025.

“Housing values have risen by about $68,000 since the first rate cut in February last year, but borrowing capacity has only increased by about $55,000,” he said.

Cotality data shows dwelling values – which includes both houses and units – rose 8.6 per cent nationally in 2025, but December had the smallest monthly increase in five months (0.7 per cent).

For house values, there was a slight easing in Sydney last month, down 0.3 per cent, and Melbourne fell 0.1 per cent. While rate hike fears and affordability pressures weighed on confidence, Sydney’s median house value is still almost $1.6 million, and Melbourne at $981,165, on Cotality data.

Lawless said, “it’s fair to say that we won’t see any more interest rate cuts in 2026. In fact, there’s a clear risk that we could see a rate hike.”

Some economists had predicted at least one interest rate cut in 2026, but a jump in inflation last year upended those expectations.

“What it demonstrates is that one or two data points can really change the outlook,” said Dr Nicola Powell, Domain’s chief of research and economics.

“It’s a timely reminder for first home buyers of the need to build up a financial buffer, so they can continue paying their mortgage comfortably if conditions change.”

All eyes will be on the Australian Bureau of Statistics’ next inflation data release, due Wednesday, which could help spur a rate rise if price pressures build.

“Even if rates stay where they are and housing values continue to rise, it is going to be challenging for first home buyers to get a foot in the door,” said Lawless.

One factor contributing to price growth at the market’s entry level is high investor activity.

“Right now, investors make up about 41 per cent of all mortgage demand, and first-home buyers make up about 22 per cent,” said Lawless.

“Normally, you would expect investors to make up about one-third of demand.”

Those investors are typically bidding aggressively for properties at the low end of the market to rent them out.

“What we are now seeing very frequently at auctions across the country is first home buyers going head-to-head with investors,” said Powell. “And, unfortunately for first-home buyers, investors tend to have deeper pockets.”

However, there is a scenario in which investor activity could moderate in 2026.

“If we don’t see investor activity slowing naturally, it is possible that the regulator could introduce credit constraints on home lending to investors,” said Lawless.

Meanwhile, first home hopefuls can use the federal government’s 5% Deposit Scheme, which lets buyers pay a 5 per cent deposit and no mortgage insurance. Another program is the Help To Buy scheme, in which the government buys up to a40 per cent equity stake in a home, reducing mortgage repayments.

“These schemes give first home buyers an edge, but policies that support people to purchase also bring forward demand, which lifts property prices,” said Powell.

Her advice?

First home hopefuls can take advantage of federal government schemes to get onto the property ladder.

“Get in early. The winners with these schemes will be the ones who take advantage of them before they push up prices for everyone else.”

Buyers’ agent Tom Penfold of Cohen Handler said being prepared and organised would make all the difference for first home buyers.

“Have your boxes ticked now: get your finance, have your deposit and be ready to go when a deal is in front of you,” he said.

At the same time, the uncertain economic outlook could work in their favour.

“Uncertainty can be a good thing because it means some people will be sitting on the fence, waiting to see how prices and rates shift. In my experience, that creates deals and opportunities,” Penfold said.

Cost of living should remain top of mind, Lawless said.

“Rents have risen about 43 per cent over the past five years, and vacancy rates remain at near-record lows at 1.7 per cent, so I can appreciate that many renters want to get out of that tight rental situation and into their own home.

“But it’s really important to be realistic about living expenses and carefully compare what it might cost to rent with what a mortgage will cost you, if rates do go up.”

For those determined to buy, pragmatism is key, said Powell.

“Your starting point should be an accurate understanding of what your repayment capacity is, rather than a suburb wish list,” she said.