Borrowing capacity is falling fast, yet one segment won't slow down
Investors took the largest share of new lending in nearly a decade, but actual borrowing capacity in Melbourne has fallen sharply since negative gearing reform became law, with the city now forecast to record the steepest house price falls of any Australian capital.
Investor lending reached 40.3% of new housing finance by value in the March quarter, its highest level since December 2016, even as the overall volume of housing loan commitments fell 6.2% over the same period.
Owner-occupiers pulled back more sharply than investors, with owner-occupier loan volumes down 6.9% against a 5.3% decline for investors, pushing the investor share higher even as total lending contracted.
That resilience sits awkwardly alongside what's happening to borrowing capacity itself. Investor borrowing capacity has fallen by an estimated 8% to 12% on a like-for-like basis since negative gearing changes took effect on May 12, according to brokers managing the transition, with reductions of up to 30% at some lenders depending on how each has implemented the new rules.
Macquarie, NAB, Westpac, ING and Great Southern Bank have each issued updated serviceability policies, generally distinguishing between properties acquired before and after May 12, adding cross-checking and resubmission work to deals already in progress.
Victoria's own investor lending has grown faster than any other major state over the past year, up 13% annually and accelerating from 9% growth the year before, even as the state's own land tax settings, in place since 2024, were already weighing on investor appetite ahead of the federal changes.
Why this matters for Melbourne specifically
Negative gearing restrictions and capital gains tax changes have now cleared their final parliamentary hurdle.
Treasury has confirmed that around 85% of the projected $3.6 billion in additional revenue from the reforms over the forward estimates will come from the negative gearing restrictions, with the remaining 15% from the capital gains tax discount changes. The two measures interact with each other, since carry-forward negative gearing deductions can be applied against future capital gains, which is why the figures were not separated in the original budget papers.
A Senate Economics Legislation Committee review has backed the legislation despite industry opposition. Master Builders Australia has argued the changes will cut new housing supply by close to 9,000 homes over four years, citing modelling that a property renting at $600 a week could see annual rent rise by $477 by 2029–30 as a result.
Against this backdrop, the Domain Forecast Report, covering the 12 months to June 2027, has pointed to Melbourne house price falls of up to 8%, the steepest decline tipped for any capital.
Domain's chief of research and economics, Dr Nicola Powell, attributed this to the structural effect of the tax changes layered on top of a cyclical decline driven by three interest rate rises this year, combined with Victoria's debt position and an existing shift among investors toward other markets.
ANZ Research now expects Melbourne housing prices to fall 1.7% across 2026, with Cotality data showing values down a further 0.6% in April and top-quartile properties declining for five consecutive months.
Westpac has gone further, warning Victoria faces its deepest household squeeze on record, with consumption per capita forecast to fall a cumulative 3.5% over the five years to FY2028 and Melbourne house prices already down 1.5% over the quarter to April against a 1.6% national increase. The bank has flagged the November 2026 state election as a further risk to private sector investment decisions.
Regulatory pressure compounds the squeeze
The lending environment investors are navigating has tightened on a second front. APRA's debt-to-income limits, which took effect 1 February 2026, cap the share of new lending any bank can write at six times income or more at 20%, with the restriction applied separately to investor and owner-occupier loans.
The timing means Melbourne's investor segment is absorbing tighter macroprudential settings, new serviceability calculators, and the loss of negative gearing on established properties within the space of a few months of each other.
Mortgage stress has continued climbing through this period, with 29% of mortgage holders, or 1.538 million people, now classified as "at risk" as of the three months to May, the fourth consecutive monthly increase, and 20.4% classified as "extremely at risk."
How the forecast compares across capitals
Sydney is forecast to see falls of between 3% and 7%, while Canberra's decline is expected to top out at 4%. Brisbane, Adelaide and Perth are forecast to move in the opposite direction, with price growth of between 3% and 9%.
Across the combined capitals, the outlook ranges from a 2.5% fall to a 1.5% rise, a narrower range than Melbourne's forecast on its own.
Not every industry figure agrees with the scale of the forecast. Kay & Burton executive director Peter Kudelka pointed to several unresolved factors, including the tax changes, the state election, inflation, fuel prices and the war in the Middle East, and questioned whether a fall of this size would occur, comparing it to predictions made during the pandemic that did not materialise.
Noel Jones, chairman of the Noel Jones Real Estate Group, said confidence was low ahead of the 28 November state election but expected it to recover over time, noting that lending volumes had fallen by 30% alongside continued interstate migration out of Victoria.
