But rate rises, affordability pressures and budget policy changes threaten to curb investor demand
Investor activity in Australia's housing market may have reached a peak, with investor share of total loan volumes climbing to a record 41% in the March quarter.
However, renewed Reserve Bank rate rises, stretched affordability and significant federal Budget policy changes are expected to weigh on investor lending in the months ahead, according to new data analysed by Cotality.
The overall volume of housing loan commitments fell 6.2% in the March quarter, with total lending value down 3.8%, as interest rate increases and weakening consumer confidence suppressed demand. Owner-occupiers pulled back more sharply than investors — owner-occupier loan volumes fell 6.9% against a 5.3% decline for investors — pushing the investor share of lending to its highest level since the series began in September 2019. In value terms, the investor share reached 40.3%, a level not seen since December 2016.
Consumer sentiment deteriorated markedly after the Iran war commenced in late February, driving energy prices higher. Housing affordability and mortgage serviceability had already become stretched before the current tightening cycle began, and the RBA has delivered three rate rises in 2026, with two falling within the March quarter alone.
Within the owner-occupier segment, first-home buyer (FHB) volumes held up better than other owner-occupiers, though the picture differed in value terms. The average new loan size for FHBs declined approximately 2.6% over the quarter, while other owner-occupiers saw their average loan size rise 1.6%. The government's 5% Deposit Scheme is thought to have provided some support to FHB volumes.
State-level data showed significant variation. New South Wales — which accounts for the largest share of investor lending nationally at 43.9% — led the decline in investor loan volumes, followed by Western Australia. South Australia and Tasmania bucked the national trend, recording increases in investor lending volume; Tasmania's investor loan volumes were up nearly 74% on the same quarter a year earlier, though from a low base. For first-home buyers, South Australia recorded the steepest volume fall at 6.1%, with Queensland down 5.8%.
"Overall, VIC continues to lead FHB lending activity as a share of the total, with Melbourne's relative affordability advantage over other cities, as well as tax policy settings that discourage investors, contributing to this trend," said Gerard Burg (pictured right), head of research for Australia at Cotality.
"That said, this share has fallen in recent quarters as the share of investor lending has accelerated. WA has seen a notable pickup in FHB activity as well, while NSW continues to lag."
The near-term outlook points to further softening. "Dwelling values are already contracting in Sydney and Melbourne while growth is slowing in the mid-tier capitals," Burg said.
"Demand is likely to soften further, as the full impact of the interest rate tightening (particularly the hike in May) has not yet been felt. There is the possibility that the RBA could continue to lift rates in the short term, given trimmed mean inflation has remained stubbornly above the central bank's target range."
Federal Budget policy changes present a particular risk to investor activity, Burg added. "Policy changes in this year's federal Budget are likely to have a negative impact on investor demand, and by extension, new investor loans," he said.
"The removal of negative gearing for purchases of existing properties is likely to reduce investor lending on a net basis; while some new investors may be drawn to purchase newly constructed properties (where negative gearing is retained), they have historically favoured existing dwellings and may now look to other (non-property) assets instead.
"With rental yields well below the cost of borrowing (particularly if interest rates rise further), fewer investors into existing properties would be able to generate a positive cashflow, meaning that the costs of holding these assets are now substantially higher and serviceability challenges more prominent."
First home-buyers are also expected to pull back further, given their greater sensitivity to rate movements. "Compared with other property purchasers, first home buyers tend to be more rate sensitive than others, meaning that we may see a further slowdown in FHB lending activity in coming quarters," said Gerard Burg, head of research – Australia at Cotality. "This trend would be likely to reverse once the RBA is eventually able to cut interest rates once again, although the impact is likely to remain uneven across the country, influenced by the relative affordability of different markets."
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