Westpac assesses what is ahead for the residential real estate sector, seeing a sharp and sustained pull-back from mid-2026, already slowing from interest rate hikes

This is the summary from Westpac's June Housing Pulse report. The original is here.

Australia’s housing markets are facing into a more challenging and uncertain outlook. Tax changes announced in the Federal budget are set to drive a major shake-up with investor demand now expected to see a sharp and sustained pull-back from mid-2026. With conditions already slowing in response to rising interest rates and more rate increases still on the cards, a more pronounced correction now looms.

Tight supply, robust population-driven demand and an expected pull-back in investor sales limit downside risks. However, the combination of elevated uncertainty and a sharp drop in turnover could see markets hit a more material ‘air pocket’ near term.

As detailed in our full note, the tax changes mainly affect new investor purchases of existing houses, removing the ‘negative gearing’ treatment allowing losses to be deducted from other income and switching from a flat 50% discount to CPI indexation for capital gains. ‘Grandfathering’ means existing investors are largely unaffected, with continued access to negative gearing benefits now a strong incentive for this group to retain assets. An exemption for newly-built dwellings means these will be more appealing for new investors going forward.

We expect the changes to drive a steep fall in investor activity with wider market turnover declining 20%. Prices are expected to move 2% lower nationally, leaving them flat over calendar 2026. Corrections are more material in Sydney and Melbourne with price growth slowing abruptly in Brisbane, Adelaide and Perth but still coming in positive for the full year.

Our June Housing Pulse report shows the initial sentiment reaction is broadly consistent with this assessment. Our Westpac Consumer Housing Sentiment Index is down sharply, pointing to about a 20% decline in turnover. Consumers’ house price expectations more specifically have pulled back sharply as well but have moved from strongly positive to about average. They are well above the ‘net negative’ lows seen in 2022 and in previous cycles, suggesting prices are reasonably well-anchored.

That said, it is still early days and there are other challenges ahead. The other major development since our February report is the global energy shock emanating from conflict in the Middle East. This is adding to Australia’s inflation problems with more rate hikes likely to be required to manage the threat. How this lands is the other big question for housing.