Australia’s property market is experiencing a notable decline in confidence as the Australian Property Institute’s (API) Property Market Outlook Index has fallen to 6.1 in the second quarter of 2026. This marks a decrease from 7.1 in the first quarter and 7.3 in the final quarter of 2025. The downturn is evident across all five major states and every key asset class, highlighting the impact of the Reserve Bank’s recent cash rate increases in February and March, which have reshaped market expectations.

The survey, which included insights from 247 property professionals and was conducted between 12 and 30 March 2026, revealed that the interest rate outlook has now emerged as the primary factor exerting downward pressure on property prices across major asset classes. Despite this, the national index remains above the neutral level of 5.0, indicating that while market sentiment is cooling sharply, it has not yet tipped into outright weakness.

API Chief Economist Dr Sherman Chan commented on the rapid shift in market sentiment, attributing it to inflation concerns, global uncertainty, and the looming prospect of further rate increases. “The property story has changed quickly in 2026. For the past several years, constrained supply has been the dominant force in the market. Following the February and March cash rate increases, the interest rate outlook has now become the biggest drag on confidence across the property sector,” Dr Chan stated.

Industrial property has emerged as the strongest-performing asset class, surpassing residential property in resilience. Meanwhile, the office and retail sectors have recorded sub-neutral sentiment for two consecutive quarters, with both sectors sitting below the 5.0 mark. “Confidence has softened in every major state and every asset class. Industrial property is now the standout performer, residential remains supported by structural undersupply, and office and retail continue to struggle below neutral as higher rates and weaker business and consumer confidence bite,” Dr Chan added.

Looking ahead to the third quarter, Dr Chan emphasised the need for greater certainty in several areas, including the resolution of the Middle East conflict, clearer signals from the Reserve Bank of Australia (RBA) regarding rate paths, and evidence that structural opportunities, particularly in industrial property, are generating real activity. “Recovery will require greater certainty on a few fronts: some resolution of the Middle East conflict and its effect on fuel supply; a clearer signal from the RBA on the rate path; and evidence that structural opportunities, particularly in industrial property, are generating real activity. Businesses may need to maintain a degree of optimism because the fundamentals in several sectors are stronger than the sentiment numbers suggest,” he said.

The industrial property sector has solidified its position as Australia’s most resilient asset class, scoring 6.8 on the index. This strength is attributed to factors such as e-commerce demand for warehouses, ongoing infrastructure investment, technological development, and robust mining activity. The gap between industrial and office properties illustrates the quarter’s story, with industrial scoring 6.8 compared to office’s 4.6, a notable difference of 2.2 points. Every state’s industrial score sits above the neutral threshold, with Western Australia leading at 7.5, followed by South Australia at 7.3 and Queensland at 7.2.

Residential property has experienced the sharpest single-quarter decline of any asset class, dropping from 7.2 in Q1 to 6.2 in Q2. However, it remains the second-strongest sector overall and well above the neutral level. Structural factors, such as the ongoing housing supply crisis, continue to limit the fall. “The housing supply crisis has not gone away. The ongoing lack of new and existing housing supply, continued population growth, and the federal government’s 5% Deposit Scheme are still exerting upward pressure on residential prices even as confidence falls. Sentiment is soft, but the fundamentals remain supported by structural undersupply,” Dr Chan explained.

In the office sector, sentiment has edged down from 4.9 in Q1 to 4.6 in Q2, with Victoria being the weakest market nationally at 3.6. Office valuers cite the interest rate outlook, weakening business confidence, and the evolving nature of work as primary sources of downward pressure, including AI adoption and ongoing work-from-home arrangements. Meanwhile, the retail sector fell from 5.4 in Q1 to 4.9 in Q2, marking its first sub-neutral reading. Consumer confidence, job market conditions, and shifting shopping preferences are weighing on the sector, with New South Wales being the weakest state at 4.2.

Agricultural property sentiment eased from 6.2 in Q1 to 5.7 in Q2 but remains above neutral. Demand for specific agricultural products, technological development, and the quality of agricultural land provide support, while physical climate risks, commodity prices, and the interest rate outlook pose challenges.

State-by-state, Western Australia remains Australia’s strongest property market, with an index score of 7.8, despite a significant drop from 9.0 in Q1. Queensland follows as the second-strongest market at 7.3, with South Australia at 6.7. New South Wales (5.2) and Victoria (5.5) are approaching the neutral level, with valuers in both states flagging rate hikes and a weakening job market as the primary risks in the coming months.