Tax policy overhaul gives rise to ‘unique’ housing correction

Yasmine Raso

Senior Journalist

7 July 2026

It has taken not even two months since this year’s Federal Budget was delivered for Australia’s housing market to set a course for correction as it faces the impending impact of significant changes to tax policy, according to the latest commentary from HSBC.

The latest figures for the month of June have all but confirmed that the changes related to investment properties, including negative gearing and capital gains tax (CGT) discounts, combined with the Reserve Bank of Australia’s policy tightening approach, have “rapidly sapped investor demand from the market”.

“Since late 2025, when inflation resurged, we have expected the housing market would cool in 2026. Then, in May, just after the Federal budget and its significant tax policy changes, we adjusted our forecasts lower,” the bank’s Chief Economist, Paul Bloxham, said.

“Our central case is for housing prices to decline in H2 2026 and fall by 2-6% over 2027. The pace of decline in the June figures suggests downside risk to our central forecast. Rate cuts are likely to be needed to deliver a turnaround, but we see these as likely to be a year away.

“We expect that the housing price declines will be broad-based across the nation. So far, housing prices have only declined in the major capital cities, Sydney and Melbourne, but the mid-tier cities are seeing a loss of momentum in housing price growth.

“Our take is that a significant driver of recent momentum in the mid-tier cities – including Perth, Brisbane and Adelaide – has been investor demand. There have been good fundamentals too – with stronger population growth and limited housing supply in these mid-tier cities.

“But, this is, of course, how typical bubbles form. A well-grounded fundamentally-supported story, attracts speculative interest and the market becomes exuberant with excessive momentum.

“The Perth market seems the most overheated, with housing prices up 24% over the past year, and 126% over the past six years. Population growth is strong, housing supply has been weak, so the fundamentals are supportive.

“At the same time though, last year investor approvals were 40% of new approvals in Western Australia, up from just 15% of the total in 2022. And there had been a significant rise in inter-state investors – for example, Sydneysiders buying an investment property in Perth.

“Investor demand is now drying up quickly. This is weakening the Sydney and Melbourne markets already and we expect it to be a key driver of housing price falls in the smaller cities too – including Perth, Brisbane and Adelaide – in the coming quarters.”

However, Bloxham noted that current housing market forecasts are plagued by more-than-usual uncertainty given the added simultaneous impact of the tax system changes, removing the ability to consult with history on what might happen to the market.

“Negative gearing has been a feature of the tax system for decades and the capital gains tax discount has been in place since 1999,” he said.

“Removing these all at once has no recent historical precedent to help draw firm conclusions and may make this housing correction quite different to previous, often interest-rate driven, housing price cycles.

“Although the RBA does not target housing prices, the housing price correction will have implications for monetary policy. As there is a positive correlation between housing price cycles and consumer spending and empirical studies show some (small) wealth effects, the fall in housing prices should be expected to weigh on consumer spending.

“Part of this reflects that falling housing prices tend to weaken housing construction, and with fewer new dwellings, there is less demand for new furniture and appliances.

“At some level, the cooling housing market will be helpful for the RBA if it slows down consumer spending, as this will also help to take some more pressure off inflation, which is too high.

“Through this mechanism, the cooling housing market adds to the case for the RBA, if forward-looking in its approach, to remain on hold, rather than hike further.”