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The Australian Property Institute's quarterly Property Market Outlook Index has fallen to 6.1 in the second quarter of 2026, down from 7.1 in the previous quarter, as back-to-back interest rate increases from the Reserve Bank of Australia emerge as the single biggest drag on sentiment across every state and asset class.
The national index, which surveys property valuers, fund managers and analysts on a scale where 5.0 represents neutral sentiment, recorded declines across all five major states and all four tracked asset classes for the first time since the survey's inception.
The drop follows the RBA's February and March cash rate increases, the latter lifting the cash rate to 4.1 per cent.
API chief economist Dr Sherman Chan says the interest rate outlook has overtaken constrained supply as the dominant concern weighing on the property sector.
“The property story has changed quickly in 2026," says Chan.
"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.”
Industrial property remained the strongest-performing asset class with an index reading of 6.8, buoyed by sustained e-commerce demand and logistics investment, though it too declined from the prior quarter.
Residential dropped a full point to 6.2, while office fell to 4.6, reflecting persistent hybrid working patterns and elevated vacancy rates in CBD markets.
Retail slipped below the neutral threshold of 5.0 for the first time, recording a reading of 4.9 as consumer spending pressures from higher borrowing costs fed through to tenant demand expectations.
By state, Western Australia continued to lead the nation at 7.8 but posted the sharpest absolute decline, falling from 9.0 in the first quarter as the mining investment cycle showed signs of moderating.
Queensland recorded 7.0, South Australia 6.9, Victoria 5.5 and New South Wales 5.2 - with the two largest state economies approaching the neutral line.
Chan says structural factors are providing a floor beneath sentiment even as cyclical headwinds intensified.
“The housing supply crisis has not gone away," she says.
"The ongoing lack of new and existing housing supply, continued population growth and the federal government’s 5 per cent 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."
The RBA's Monetary Policy Board, in its March statement, cited Middle East conflict-driven inflation pressures, rising short-term inflation expectations and greater capacity pressures in the economy as justification for the 25 basis point increase in the cash rate to 4.1 per cent.
Property valuers surveyed in the API index also cite weakening job market conditions as a key risk to the outlook, though official labour market data paints a more resilient picture.
The Australian Bureau of Statistics has reported unemployment steady at 4.3 per cent in March, with 18,000 jobs added to the economy on a net basis.
Full-time employment rose by 53,000 positions, partly offset by a 35,000 decline in part-time roles - a compositional shift that suggests employers continue to invest in permanent headcount even as broader confidence softens.
Chan says the disconnect between labour market data and on-the-ground sentiment reflects forward-looking concerns among property professionals rather than current conditions.
“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," she says.
"Businesses may need to maintain a degree of optimism because the fundamentals in several sectors are stronger than the sentiment numbers suggest.”
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