Cotality's August index shows the downturn is hitting freestanding stock hardest, while strata returns a full point more in rent. With the cash rate at 4.35% and negative gearing changes locked in for 2027, that spread now decides which portfolios hold.
National dwelling values fell 0.9% in August and 3.1% over the quarter, according to Cotality's Home Value Index (as at 31 August 2026). The decline is not landing evenly. Houses gave up 1.1% for the month and 3.3% for the quarter. Units gave up 0.5% and 2.2%. On income the gap is wider again: units return a gross 4.6% nationally against 3.5% for houses.
For investors servicing debt with the cash rate at 4.35% (RBA, 11 August 2026), and lenders still assessing them 3 points above the rate they actually pay, that 1.1-point yield gap decides whether a holding is a manageable cash drain or a serious one. Add legislated changes to negative gearing and the capital gains tax discount from 1 July 2027, and the default investment purchase of the past decade, a freestanding house in a growth corridor, no longer looks automatic.
The Core Data and Index Shift
The divergence is sharpest where values are highest. Cotality's August index has Sydney houses down 1.8% for the month and 5.4% for the quarter, while Sydney units fell 0.4% and 2.9%. Melbourne houses fell 1.4% and 4.6%, against 0.5% and 2.4% for units. The median Sydney house now sits at $1,494,878; the median unit at $878,176.
That distance is the mechanism. Buyers who cannot clear serviceability on a house are either sitting out or stepping down into strata stock, and the index is recording the result.
Two caveats belong on the record. Over 12 months houses remain ahead, up 2.9% nationally against 2.0% for units, so this is a downturn pattern roughly a quarter old, not a decade trend. And the affordable end is losing its shelter. Cotality research director Tim Lawless said the narrowing gap between the upper and lower quartiles is "another sign this downturn is broadening", with lower-priced housing "becoming less insulated as affordability pressures and softer demand weigh more evenly across the market".
| Market | House median | Houses, qtr | Unit median | Units, qtr |
|---|---|---|---|---|
| Sydney | $1,494,878 | -5.4% | $878,176 | -2.9% |
| Melbourne | $920,432 | -4.6% | $629,054 | -2.4% |
| Brisbane | $1,180,552 | -2.9% | $854,721 | -2.0% |
| Perth | $1,043,478 | -3.0% | $733,223 | -4.1% |
| National | $995,600 | -3.3% | $736,252 | -2.2% |
Priscilla Cheung
Structural and Policy Drivers
The Reserve Bank has lifted the cash rate three times this year: to 3.85% in February, 4.10% in March and 4.35% in May, then held at its 11 August meeting. The Board said trimmed mean inflation "remains elevated" and is not expected back at target until late 2027, and that it will raise rates further if upside risks materialise.
APRA left the serviceability buffer at 3 points on 28 May 2026, citing uncertainty in the operating environment while noting that arrears and non-performing loans remain low. The buffer is unchanged but the floor it sits on has moved with every hike, compressing maximum borrowing capacity. That compression bites hardest in the house segment, where the dollar gap between what a buyer wants and what a lender will approve is largest.
Tax settings push the same way. Under legislation passed in 2026, negative gearing on residential property is limited to new builds, and the 50% CGT discount is replaced by cost base indexation with a 30% minimum tax rate. Both apply from 1 July 2027, with properties held at 7.30pm AEST on 12 May 2026 grandfathered. Investors should confirm their own position against current ATO guidance and with their adviser.
John Angga
Practical Implications for Portfolio Strategy
The spread runs across every capital on Cotality's August figures, and it is widest where houses are least affordable: Sydney units return 4.4% against 2.9% for houses, Melbourne 5.1% against 3.5%.
| Market | Houses | Units | Unit advantage |
|---|---|---|---|
| Sydney | 2.9% | 4.4% | +1.5 pts |
| Melbourne | 3.5% | 5.1% | +1.6 pts |
| Brisbane | 3.3% | 4.1% | +0.8 pts |
| Adelaide | 3.4% | 4.4% | +1.0 pts |
| Perth | 3.8% | 5.0% | +1.2 pts |
| Hobart | 4.3% | 4.7% | +0.4 pts |
| Darwin | 5.8% | 7.4% | +1.6 pts |
| Canberra | 3.9% | 5.4% | +1.5 pts |
| National | 3.5% | 4.6% | +1.1 pts |
That is a buffer, not a solution. Lawless said "yields would need to rise substantially before rental income offsets holding costs, particularly while interest rates remain elevated." The strategy narrows the monthly shortfall; it does not close it.
Three things to work through before acting on the spread. Model the strata levies, not just the yield: sinking fund contributions, insurance and remediation levies sit outside the yield figure and can wipe out a 1.1-point advantage on an older complex, so read three years of minutes and the fund balance before signing. Check lender policy on the stock before you fall for the suburb, because minimum floor area rules and postcode concentration limits vary by lender and can force a lower loan-to-value ratio on exactly the apartments the yield case favours. And do not buy the outer ring assuming a floor under prices; on Cotality's read, that floor is going.
Conditions do favour patient buyers. Capital city advertised stock was 24% above a year earlier in the four weeks to 30 August, quarterly sales ran 15.5% below year-ago levels, and auction clearance rates held below 50%.
What to Watch This Spring
The Reserve Bank next meets on 29 September. A fourth hike would deepen the serviceability squeeze that is driving the split; a hold would be the third in a row and would leave the cash rate unchanged since May.
Watch three series.
- The lower quartile. Whether its decline steepens in Cotality's October release, which tests how much of the outer-ring buffer is left.
- The national vacancy rate. At 1.9% in August, up from a record low of 1.5% in February. A looser rental market erodes the yield case that makes units work.
- New-build pricing. How it moves as 1 July 2027 approaches, given new builds are the only residential asset that keeps full negative gearing.
