Rising interest rates and recent tax changes threaten a more pronounced correction for Australia's housing markets, where conditions have already been slowing amid a challenging and uncertain outlook, Westpac said in its Housing Pulse report filed Monday.
Although tight supply and strong population-driven demand help limit the downside risks, investor demand is now expected to see a sharp and sustained pull-back due to tax changes proposed in the federal budget, the bank said.
The tax proposals primarily impact new investor purchases of existing homes, removing the "negative gearing" treatment allowing losses to be deducted from other income and shifting from a flat 50% discount to consumer price index indexation for capital gains.
But existing investors have continued access to negative gearing benefits, giving them a strong incentive to retain assets, while an exemption for newly-built houses will make them more appealing for new investors.
"We expect the changes to drive a steep fall in investor activity with wider market turnover declining 20%," Westpac said. "Prices are expected to move 2% lower nationally, leaving them flat over calendar 2026."
Nationally, dwelling prices fell in April and May to return a flat reading on a three-month basis, while turnover has also softened somewhat alongside a material decline in auction clearance rates, according to the report.
The Westpac-MI "time to buy a dwelling" index sank 14.3% over the three months to May as back-to-back rate hikes took the index to an "extremely weak" 72 reading, the bank said. The index rebounded in June but is still 3.4% below its February level and "woeful" compared to the long-run average of 119.