Investment bank Morgan Stanley said the policy shift has fundamentally changed the economics of property investment and could drive a retreat by investors, who account for around one-third of marginal housing demand, News.Az reports, citing News.

The bank estimated that Australian house prices could decline between five and 10 per cent, describing the potential correction as one of the largest in decades. It warned that under certain conditions a larger adjustment would be needed to restore investor returns, as borrowing power and expected capital gains are reduced.

Other economists echoed a weakening outlook. HSBC’s Paul Bloxham said home values could remain flat through 2026 before falling by 3 to 6 per cent the following year, pointing to weaker momentum, higher interest rates and reduced investor activity following the tax changes.

AMP’s Shane Oliver also warned that national prices could turn negative within months, saying that higher borrowing costs and reduced after-tax returns would push investors out of the market. He added that the outlook could favour first-home buyers as competition from investors declines.

Despite the pessimistic forecasts, some banks including Commonwealth Bank and ANZ expect modest growth rather than declines, though both have downgraded earlier projections.

The broader housing slowdown comes amid softer auction clearance rates in Sydney and falling prices in major cities, with analysts warning that weaker housing conditions could weigh on consumer spending, bank lending and wider economic activity.