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The forecasts, published by Westpac chief economist Luci Ellis alongside senior economists Matthew Hassan and Mantas Vanagas, predict new investor activity will fall 34 per cent in the near term, while total housing market turnover is expected to decline by 20 per cent.
Dwelling prices across the major capital cities are also forecast to remain flat through calendar 2026.
According to the economists, the market faces the risk of a near-term “air pocket”, with lower turnover, uncertainty around tax changes, and higher interest rates potentially combining to create sharper price movements.
However, they noted this risk was partially offset by grandfathering provisions and continued positive price expectations.
The proposed policy changes in the federal budget include adjustments to capital gains tax (CGT), negative gearing, and discretionary trust taxation.
Long and medium-term predictions
Westpac’s economists said they expect the tax changes to significantly alter investor behaviour over the next several years, particularly around newly built housing stock.
The bank forecast investor demand would increasingly shift towards newly built dwellings, with the share of new-build purchases expected to rise from around 20 per cent to 40 per cent of investor activity, despite the overall slowdown in the market.
Outstanding investor credit growth is also expected to slow from around 9.5 per cent annually to below 7 per cent by the end of this year and around 4 per cent by the end of 2027.
Westpac also forecast dwelling price growth would stall nationally through 2026, with Sydney and Melbourne tipped to record outright price declines of 3 per cent and 4 per cent, respectively. Brisbane, Perth, and Adelaide are still expected to post growth, although at a slower pace, with forecasts of 9 per cent, 13 per cent, and 7 per cent, respectively. Nationally, the economists expect a modest 2 per cent decline over the second half of the year.
Over the medium to longer term, the economists said the market was likely to see firmer rental yields, driven by lower prices and higher rents as the market adjusted to changes in after-tax investment returns.
Westpac economists also said the carve-out for newly built dwellings may eventually support higher levels of construction activity, estimating the policy changes could lift new dwelling construction by between 15,000 and 30,000 dwellings annually over time.
However, they noted there remained uncertainty around whether the residential construction sector could meet additional demand, particularly amid elevated construction costs and higher interest rates.
The economists further suggested the changes could reshape the rental market over time, potentially increasing “landlordism” or large-scale ownership of rental housing, as smaller investors face reduced tax advantages.
Further implications
Westpac economists said the grandfathering provisions attached to the reforms would strongly encourage existing investors to retain negatively geared properties for as long as possible while also maintaining higher levels of debt against those assets to maximise tax benefits.
They also noted the exemption for newly built dwellings would make investment in new housing more attractive compared to existing homes. Currently, around 18 per cent of investor finance approvals are directed towards the construction or purchase of newly built dwellings.
The wider consequences of negative gearing were discussed on a recent episode of Broker Daily Uncut, in which strategies such as moves to SMSF structures or investments in new builds or commercial property may become more attractive options.
The economists also pointed to broader economic conditions likely to shape the impact of the reforms. They highlighted rising interest rates, ongoing supply shortages, and strong population growth as major factors influencing housing market conditions.
Westpac noted the Reserve Bank of Australia’s recent rate increases had already begun weighing on housing activity and prices in some markets, with the bank expecting a further two 25-basis-point rate hikes in coming months.
At the same time, housing supply remains historically tight across much of the country, particularly in Brisbane, Adelaide, and Perth, where rental vacancy rates remain below 1 per cent.
The economists said strong population growth, currently sitting at around 1.5 per cent annually, had underpinned housing demand through the previous interest rate tightening cycle and would continue supporting the market despite weaker investor conditions.
[Related: Broker’s $17k billboard blitz targets CGT reforms]
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