Australia’s housing market is facing a two-fold slowdown in investor activity and a decline in turnover as rising rates and tax reforms reduce buyers’ borrowing capacity.

New analysis has shown a projected decline in housing market turnover and new investor activity, following rising interest rates and tax reforms announced in the budget.

According to Westpac’s Housing Forecast Update, the property market could see a 34 per cent fall in new investor activity over the next year and a half, in light of the adjusted tax settings.

With negative gearing restricted, investors will lean more towards newly built dwellings, which make up about 40–50 per cent of new investor loans.

At the same time, the data showed total housing market turnover was forecast to decline by 20 per cent, led by a slowdown in investor demand, with fewer investment properties being sold.

Westpac’s report, by senior economist Matthew Hassan and chief economists Luci Ellis and Mantas Vanagas, said the government’s tax reforms will reduce the relative attractiveness of new housing investment.

“‘Grandfathering’ for existing investors limits near-term impacts while an exemption for new investments in newly built dwellings will make this a more attractive option for investors,” it said.

The report also forecasts dwelling price growth to stall, on average, across the major capital cities for calendar 2026.

It said the slowdown in turnover, combined with higher rates and tax uncertainty, could lead to a significant “air pocket” for markets that had the potential for sharper price movements.

“This risk is mitigated somewhat by grandfathering provisions and positive price expectations.”

As a medium to long-term shift in the market, the report said there was likely to be a gradual firming in average rental yields, with markets moving to “equalise” the change in after-tax investment returns.

According to the report, the shift implied a combination of lower prices and higher rents compared to the baseline, estimating that a 0.5 ppt rise in average gross rental yields would require variations in both of around 3–7 ppt.

Despite the predictions, recent consumer price index (CPI) data has sparked hopes of a rate hold in June, which could see renewed buyer confidence in the market.

The headline inflation figure rose 4.2 per cent annually, a slight drop from the 4.6 per cent increase in March, according to the Australian Bureau of Statistics.

PRD chief economist, Dr Diaswati, said that with the likelihood of a rate hold in June, buyers may have more borrowing power, giving them greater confidence to purchase in their desired price range.

However, as the next meeting won’t be until August, Diaswati said it was unclear what the rest of the year would look like for interest rates.

“The Reserve Bank of Australia (RBA) predicted a higher cash rate environment and upward trend between now and the end of 2026, so there could be another cash rate hike before the end of the year,” she concluded.

This article was first published on Real Estate Business, a sister-brand of Property Buzz.