Australia's housing market is facing its most significant policy shock in decades, with Westpac economists warning that federal budget changes to negative gearing and capital gains tax will drive a sharp contraction in investor activity and bring dwelling price growth to a halt across the major capital cities this year.
The reforms, announced on 12 May, restrict the ability for investors in existing properties to deduct net rental losses against non-property income such as wages, effective from budget night for new purchases of existing properties, with full implementation from July 2027.
Under the revised CGT arrangements, the 50% discount will be replaced by an inflation-indexation model. Crucially, both negative gearing and the existing CGT discount will be preserved for new investments in newly built dwellings — a carve-out Westpac expects to significantly redirect investor demand.
Westpac's modelling forecasts a 34% fall in new investor activity in the near term, with the share of investor loans directed at newly built dwellings expected to nearly double — rising from around 20% currently to as high as 40–50%.
The retreat had already begun before the budget landed: ABS lending data for the March quarter shows new investor loan commitments fell 5.3% over the quarter, part of a broader 6.2% decline in total home loan commitments — the weakest quarterly result in three years. Combined with the RBA's three 25-basis-point rate increases delivered in February, March, and May, total housing market turnover is expected to decline by 20%.
On prices, Westpac now expects dwelling values to end 2026 flat on average across the major capitals. Sydney and Melbourne are forecast to record outright declines of 3% and 4% respectively, while Brisbane (9%), Perth (13%), and Adelaide (7%) are expected to maintain positive but slowing growth.
"Note that this implies a modest 2% decline nationally over the second half of the year, with prices having risen 2% over the year to date," the Westpac economists said.
Other forecasters are more bearish. Morgan Stanley has tipped a 5% to 10% national price fall — one of the largest corrections in 40 years — while HSBC's Paul Bloxham sees values finishing 2026 roughly flat before declining 3% to 6% in 2027. CBA's Luke Yeaman is more measured, estimating the tax changes alone could push prices 3% lower over three years, with steeper falls in apartment and townhouse-heavy segments.
Westpac flagged a near-term risk of a more pronounced correction — an "air pocket" — if the slowdown in turnover, tax uncertainty, and further rate hikes coincide. This risk is partly offset by grandfathering provisions, which give existing negatively geared investors a strong incentive to hold rather than sell.
Beyond the immediate impact, Westpac identifies several structural shifts likely to play out over the next two to three years. Rental yields are expected to gradually firm — by an estimated 0.5 percentage points — as markets adjust to lower after-tax investment returns through some combination of lower prices and higher rents.
That pressure is landing on an already strained market: with the national vacancy rate at just 1.36% in April and rental affordability at its worst since at least 2008, REA Group's economics team warned that "policies that reduce investor participation, even modestly, carry a higher risk of tightening rental supply" — with middle-ring suburbs most at risk.
New dwelling construction is also expected to eventually lift, with the carve-out for newly built properties estimated to drive an additional 15,000–30,000 dwellings per year over time.
Westpac also anticipates a gradual move towards what it describes as "landlordism" — where rental housing becomes increasingly concentrated among investors with multiple properties, who can offset losses across their portfolios, rather than individual investors holding one or two properties.
Grandfathering of the existing rules means near-term selling pressure from existing investors is unlikely to be significant. However, the report notes it remains unclear whether grandfathering will continue to apply if properties are transferred — for example, through inheritance — a point of uncertainty that could affect long-term estate planning for mortgage clients.
On Treasury's own numbers, the tax changes are projected to reduce the cumulative number of new homes built over the next decade by 35,000 — a net negative for supply that REA Group warns the budget's $2 billion Local Infrastructure Fund only partially offsets.
With the legislation yet to pass the Senate, the reforms are not yet law. The government is due to present the changes to Parliament on 28 May and will require Greens support to legislate.
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