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Much of the economic conversation recently has centred on the idea of a K-shaped economy - where different parts of the economy move in very different directions. The concept is often used to describe the growing divergence between high- and low-income households, with some benefiting strongly from rising incomes and wealth while others fall behind. Sydney’s housing market is now showing a similar divergence, but in reverse. Instead of premium properties leading the market, price growth is increasingly concentrated in the cheapest homes.

Since late 2023, house prices at the 25th percentile of the Sydney market have risen around twice as fast as those at the 75th percentile. The result is a widening gap between cheaper and more expensive homes, with the lower end of the market now driving much of the city’s price growth. In other words, Sydney’s housing market appears to have taken a K-turn, shifting from the prestige-led boom of the pandemic years to a cycle increasingly powered by entry-level demand.


The pattern is not unique to Sydney. Across Australia’s capital cities, cheaper homes, those in the bottom quartile of the market, have outperformed more expensive properties over the past year. This reflects a large amount of capital flowing into lower-priced housing. However, the divergence is particularly pronounced in Sydney. The gap between price growth at the lower and upper ends of the market is the largest among the capital cities, highlighting how strongly the current housing cycle is being driven by demand for the most affordable homes.


Historically, this has not been the typical pattern. Over the past two decades, price growth in Sydney has more often been led by more expensive homes, with the gap between top-and bottom-priced properties frequently negative. This was particularly evident during the major housing booms of the mid-2010s and the pandemic years, when premium suburbs consistently outperformed the rest of the market. The current cycle therefore represents a notable reversal. With cheaper homes now outperforming by around four to five percentage points, price growth is increasingly concentrated in the lower end of the market.

Several forces are currently concentrating housing demand at the lower end of the Sydney market. First-home buyers have been a major driver of activity, supported by government incentives that lower the barrier to entry. In October 2025, the federal government significantly expanded its five per cent deposit guarantee scheme, removing income limits and caps on the number of places available while increasing property price thresholds. The policy allows eligible buyers to purchase with a deposit as low as five per cent without paying lenders mortgage insurance. Recent ABS lending data suggests the change coincided with a surge in first-home buyer activity, with loans in New South Wales rising 10.9 per cent in the December quarter alone, roughly double the growth recorded for investor lending.

Borrowing conditions have also played a role. Three interest rate cuts last year improved borrowing capacity across the market, supporting both first-home buyers and investors and adding further capital to segments where prices remain relatively accessible.

Structural factors within the Sydney market are also reinforcing this shift toward cheaper homes. Prices at the upper end of the market are already extremely high, making it increasingly difficult for many households to upgrade into more expensive properties. At the same time, construction costs have surged, pushing up the cost of new housing. In many cases it is now cheaper to purchase an existing home than to build, particularly in the more affordable segments of the market. Housing supply constraints are reinforcing this dynamic, with new construction slowing as higher building costs and tighter development conditions weigh on project viability. Together these forces are concentrating the weight of funds in lower-priced properties, helping explain the strong price growth currently being observed in Sydney’s cheapest homes.

Looking ahead, price growth at the lower end of the Sydney housing market is likely to continue outperforming over the coming year. The concentration of buyer activity in cheaper homes, particularly from first-home buyers, should continue to support demand in this segment. While any renewed increases in interest rates may dampen price growth across the market, they are likely to have a greater impact on higher-priced properties, where borrowing requirements are larger and affordability constraints are more binding. As a result, the current divergence between cheaper and more expensive homes may persist for some time.


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