Australia’s national housing market is facing a sharp downturn, with new official data showing home loan commitments falling for the second consecutive quarter, a drop that leading economists have directly linked to the federal Labor government’s recent overhauls of negative gearing and capital gains tax rules.
New figures released for the June quarter show nationwide home loan commitments dropped 5.2% to $97.6 billion, following a 3.4% decline in the first three months of the year. The slump has left open house inspections across the country noticeably quieter, with far fewer prospective buyers turning out to view properties as investor activity retreats from the market.
Maree Kilroy, lead economist at Oxford Economics Australia, told reporters that the tax changes introduced by the government in May have severely eroded investor confidence in the residential property sector. “The changes to negative gearing and capital gains tax have soured investor sentiment,” Kilroy explained. “As expected, driving much of this contraction was investor lending which fell 10.2% in the quarter.”
To understand the impact of the reforms, it is necessary to break down the changes themselves. Negative gearing is a long-standing tax strategy that allows property investors to offset short-term rental losses against their personal taxable income, reducing their overall annual tax bill. The government’s reforms restricted this benefit, while changes to the Capital Gains Tax replaced a 50% discount for properties held over one year with an indexation model that adjusts for inflation when calculating taxable profit on property sales. The new structure typically leaves investors facing a larger tax bill when they sell their investment properties.
The downturn has been felt across every major Australian state, with investor lending leading the decline. The only segment of the market that avoided a fall in the total value of lending was first home buyers, even as the raw number of first home buyer loans also slipped. Kilroy noted this anomaly is likely explained by the ongoing uptake of the government’s 5% Deposit Scheme, which allows first time buyers to enter the market with a very small deposit, pushing up average loan sizes and offsetting the decline in loan volumes.
Treasurer Jim Chalmers has pushed back against criticism from investors and pushed forward with defending the tax reforms, framing the shifts as a deliberate policy to rebalance the housing market in favour of aspiring first time buyers. “It’s early days but these figures are an encouraging sign that the market is shifting in favour of first homebuyers,” Chalmers said. “Our tax reform agenda is all about helping more first homebuyers into the housing market and we expect to see those benefits play out over years, not months. We recognise that people are under pressure and we’re taking action.”
Data from the Australian Bureau of Statistics (ABS) confirmed the broad nature of the downturn, with lending falling across all borrower categories in the June quarter, bringing total activity back to levels seen at the same time last year. ABS head of finance statistics Mish Tan also noted that the Reserve Bank of Australia lifted the national cash rate for the third time in 2026 during the quarter, adding additional pressure to borrowing conditions. “While the value of home loans increased 6.8 per cent since June quarter 2025, this was lower than the 19.1 per cent annual growth recorded in the March quarter,” Tan said. She added that the 10.2% drop in investor lending marked the largest single-quarter fall for that segment since September 2022.
The slump in loan demand has already hit the country’s largest lenders, with all four major banks reporting double-digit declines in new mortgage applications through the third quarter of the year. Westpac recorded a 20% drop in applications, while the National Australia Bank and Commonwealth Bank of Australia both saw 15% falls. Looking ahead, Kilroy projected that the slowdown will continue through the coming financial year, predicting that total property turnover across Australia will fall by one fifth in the 2026-27 fiscal year.