Housing demand slows, with investors tipped to retreat

Even before investor tax changes were announced as part of last week’s federal Budget , home lending was already on the downturn .

The latest property industry data shows dwelling values are falling in Sydney and Melbourne while growth is slowing in the mid-tier capitals, largely on the back of three consecutive cash rate increases in 2026 and falling consumer confidence.

See also : Housing market weakens in uncertain times

Now, property analyst Cotality is forecasting further softening of the housing market with the full impact of federal government tax changes and interest rate tightening yet to hit.

Cotality said measures of housing affordability and mortgage serviceability were already stretched late last year, before the interest rate hikes.

Investor retreat ahead

Cotality’s head of research Gerard Burg said new tax policy changes in the federal Budget are likely to have a negative impact on investor demand.

Negative gearing tax concessions were wound back to investors purchasing existing properties from 7:30 pm, 12 May 2026 with the current capital gains tax discount on all assets to end from 1 July 2027.

“While some new investors may be drawn to purchase newly constructed properties (where negative gearing is retained), they have historically favoured existing dwellings and may now look to other non-property assets instead,” Mr Burg said.

“With rental yields well below the cost of borrowing (particularly if interest rates rise further), fewer investors into existing properties would be able to generate a positive cashflow, meaning that the costs of holding these assets are now substantially higher and serviceability challenges more prominent.”

Owner occupiers lead home lending decline

Lending indicators data for the March quarter, released the day after the Budget, showed total new loan commitments for the quarter fell 6.2%.

All categories of home buyers recorded lending declines with owner-occupier numbers (-6.9%) slowing more than investor lending (5.3% lower).

Owner occupier loans, by value, were also down 4.3% compared to investors’ 3.0%.

Overall, this saw the share of investor lending rise to a record high of 41% in March, just over the record levels it’s reached in the past two quarters .

See also : Investor home lending still going strong

First homebuyers hanging in 

But first homebuyer figures proved more robust.

The number of new loans to first homebuyers dropped less than owner occupiers overall, but fell more in value terms, with the average new first homebuyer loan size down around 2.6% in the March quarter.

At the same time, average loan sizes to owner occupiers increased 1.6%.

Mr Burg attributes the relative resilience of first homebuyers to ongoing support from the federal government’s 5% Deposit Scheme .

But it was not all good news.

“There is the possibility that the RBA [Reserve Bank of Australia] could continue to lift rates in the short term, given trimmed mean inflation has remained stubbornly above the central bank’s target range,” he said.

“Compared with other property purchasers, first home buyers tend to be more rate sensitive than others, meaning we may see a further slowdown in FHB [first home buyer] lending activity in coming quarters.”

Knock-on effects of the housing downturn

In an interview on Tuesday, RBA assistant governor Sarah Hunter acknowledged the risks of the federal government’s crackdown on property tax breaks, in combination with interest rate increases, in cooling the housing market.

Some estimates put the resulting loss of stamp duty from investor tax changes alone at more than $9 billion in one year across the five largest state governments.

Dr Hunter said the RBA was keeping a close eye on state budgets, with states making up about half of total government spending.

There have already been suggestions some states may look to make up for the stamp duty shortfall by introducing broader-based land taxes , similar to those in the ACT. 

Even before the federal Budget, Dr Hunter said the RBA had forecast housing construction activity would slow over the next two years, partly due to rising interest rates.

See also : Full transcript of Sarah Hunter’s interview with Bloomberg TV (19 May 2026)

After the release of the RBA’s May meeting minutes on Tuesday, odds have firmed of a cash rate hold at the monetary policy board’s next meeting on 15-16 June.

Financial markets are now pricing in a 9% chance of a cash rate rise next month, down from a 25% chance two weeks ago.

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