Federal Budget changes are expected to reshape Australia's housing market through 2026 and beyond
Westpac has revised down its housing market outlook following the Federal Government's Budget announcements earlier this month, forecasting that dwelling prices across Australia's major capital cities will finish 2026 flat, with Sydney and Melbourne expected to post outright declines.
The bank attributes the weaker outlook to the combined effect of rising interest rates and significant changes to capital gains tax (CGT) and negative gearing rules. Westpac expects the changes to drive a 34% fall in new investor activity in the near term, which it says will weigh on total housing market turnover by approximately 20%.
From Budget night, net losses on new residential property investments will no longer be deductible against non-property income such as wages. From July 2027, the 50% CGT discount on future capital gains will be replaced by inflation indexation, with a new minimum tax rate of 30% applying to gains. A 30% minimum rate on discretionary trusts will take effect from July 2028.
Existing investors are protected under grandfathering provisions, and new investments in newly built dwellings will retain access to negative gearing and a choice between the 50% discount or inflation indexation for CGT purposes.
Westpac notes that the removal of the 50% CGT discount is particularly significant for assets that produce large capital gains, while the changes to negative gearing represent the more material shift for most investors. Treasury estimates that roughly one-third of negatively geared rental properties receive a net tax subsidy over the life of the asset.
According to the Treasury, the tax reforms "will help level the playing field for first-home buyers, preserve the gains investors have made, and support investment in new housing supply."
Westpac forecasts Sydney will decline 3% and Melbourne 4% in calendar 2026, while Brisbane (9%), Perth (13%) and Adelaide (7%) are expected to maintain positive but slowing growth. This implies a modest national price decline of around 2% in the second half of the year, with prices having risen 2% over the year to date.
| Dwelling price forecasts | ||||||
|---|---|---|---|---|---|---|
| City | Avg* | 2023 | 2024 | 2025 | 2026f | 2027f |
| Sydney | 4.9 | 11.3 | 2.8 | 6.2 | -3 | 2 |
| Melbourne | 3.4 | 4.2 | -2.0 | 5.1 | -4 | 5 |
| Brisbane | 7.8 | 13.5 | 11.4 | 14.7 | 9 | 3 |
| Perth | 6.8 | 16.2 | 18.4 | 16.7 | 13 | 5 |
| Adelaide | 7.5 | 8.8 | 13.6 | 8.3 | 7 | 4 |
| Australia | 6.9 | -1.8 | 0.6 | 7.4 | 1 | 3 |
| Source: CoreLogic, Westpac Economics. * last 10yrs | ||||||
The bank also expects the composition of investor activity to shift, with the share of new investor loans directed towards newly built dwellings rising from approximately 20% currently to around 40%.
Westpac's revised outlook sits against a backdrop of tightening monetary policy. The Reserve Bank of Australia (RBA) has raised the official cash rate by 25 basis points in each of February, March and May. Westpac expects two further 0.25% increases in August and September.
Supply conditions remain tight. Rental vacancy rates have held near historical lows since mid-2023 and are below 1% in Brisbane, Adelaide and Perth. Total listings across major capital cities fell to around two months of sales late last year, described by the bank as a 20-year low.
Underlying demand continues to be supported by population growth of around 1.5% per annum, which Westpac credits as a key factor in the market's resilience through the 2022–24 rate-tightening cycle.
Over the next two to three years, Westpac also expects average rental yields to rise gradually as investors price in lower after-tax returns, which it estimates would require a combination of price and rent movements of three to seven percentage points. The bank also expects dwelling approvals to increase as investor demand shifts towards newly built stock, and estimates this shift could eventually support an additional 15,000 to 30,000 new dwellings per year, though it acknowledges this estimate carries material uncertainty.
MPA polling suggests a fairly even split among reader over whether nationwide house prices will decline in 2026.
Higher housing-related inflation is also anticipated in the transition period, reflecting both firmer rents and higher costs associated with newly built dwellings.
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