Australia's property market is facing its most significant headwinds in a generation, with major banks and leading economists slashing their house price forecasts following Labor's federal budget overhaul of negative gearing and capital gains tax concessions.
Morgan Stanley has issued the starkest warning, tipping national dwelling prices to fall between 5% and 10% — a correction the bank describes as one of the largest in 40 years, the Daily Mail reported.
By restricting negative gearing to new builds and tightening CGT treatment on established properties, the budget has materially changed the investment case for a cohort accounting for roughly one-third of marginal housing demand.
The bank estimates investors would need to see price falls of 15% to 20% before property investment economics fully recover — though it expects the national correction to land in the 5–10% range, partly cushioned by owner-occupiers and investors pivoting to new builds, according to the Australian Financial Review.
"Proposed tax changes to capital gains and negative gearing announced in the federal budget last week fundamentally change the asset allocation decision for Australian households. This is particularly the case for housing: the previous model of high leverage, cash flow losses, and large expected capital gains is meaningfully challenged," Morgan Stanley chief economist Chris Read and colleagues wrote in a briefing.
The impact has already registered in Sydney, the city most exposed to property investors. The final auction clearance rate last weekend came in at just 43.1%, with auction listings across Sydney and Melbourne dropping nearly 15% compared to the previous week. Sydney values have fallen 0.9% and Melbourne 1.5% over the past three months. Perth's clearance rate eased from 45.5% to 40%, even as the city led quarterly price gains at 6.8%, followed by Brisbane at 4.7%. At the top end, Sydney's highest-quartile market has slid 3.1% in three months alone.
HSBC chief economist Paul Bloxham expects home values to finish 2026 roughly flat before declining 3% to 6% in 2027, driven by rates staying "elevated for an extended period" and investors pulling back from Perth and Brisbane — markets that had previously held firm on investor activity, news.com.au reported.
AMP chief economist Shane Oliver puts the national turning point within six months, noting Sydney and Melbourne have already turned negative.
CBA chief economist Luke Yeaman takes a more measured view, estimating the tax changes alone could push national prices around 3% lower over three years, with steeper falls in investor-heavy segments such as apartments and townhouses.
"Housing is a sentiment-driven market, and the changes could see investors withdraw and financing become more difficult, driving house prices down more than expected," Yeaman said.
Veteran Sydney agent John McGrath of McGrath Estate Agents described the budget changes as the final weight on a market already burdened by rate hikes, cost-of-living pressures, and geopolitical uncertainty.
"There's no doubt this was the straw that broke the camel's back," McGrath told the AFR.
Cotality's head of research Gerard Burg was equally blunt, telling the Daily Mail that "At the national level, the housing market is already on the cusp of a downturn, with dwelling values already contracting in Sydney and Melbourne while growth is slowing in the mid-tier capitals."
For property investors on brokers' books, the combination of reduced after-tax returns, tighter borrowing capacity, and softening capital growth projections warrants a frank portfolio review.
Morgan Stanley's note — titled The game has changed for housing — warned the downturn would ripple into credit growth, construction activity, and the broader economy through the second half of 2026, and could itself become a brake on further RBA tightening as weaker prices flow through to household spending and the labour market.
Buyers are already recalibrating strategies. Brisbane-based buyers agent Debra Beck-Mewing of The Property Frontline told the AFR that clients moved quickly from shock to a revised approach, with at least one first-home buyer couple shifting from a rentvesting plan to purchasing a family home in Sydney where softening prices are opening up new options within their budget.
For first-home buyers more broadly, the data tells a mixed story. First-home buyer lending fell 4.3% in the March quarter, with overall home lending down 6.2%, as higher mortgage rates continued to suppress borrowing capacity.
Yet with investors stepping back and vendors growing more flexible — Cotality's Annabelle Mezieres noted auction volumes are holding above year-ago levels despite weak clearance rates, suggesting sellers are increasingly willing to meet the market — the competitive landscape for owner-occupiers is shifting in their favour.
"For those who are looking to get in, and already have the financing lined up, then it's not a bad time — it's probably a good time," said Shane Oliver, AMP chief economist
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