Interest rates and tax shake-up see buyer demand weaken in property market

Australia’s property market is showing signs of cooling after a series of economic shifts, with buyer demand dropping sharply following three interest rate hikes and the federal budget’s tax reforms. The May 12 budget introduced changes to capital gains tax and abolished negative gearing, prompting investors like 18-year-old New South Wales model train business owner Joshua Goodfellow to pause their property searches. Goodfellow, who planned to use negative gearing for an investment property, now expects to wait at least three months to reassess the market. Data from Cotality shows the clearance rate for homes sold at auction fell to 43.1% in the first weekend after the budget, down from higher levels in previous months. Westpac analysts forecast a 34% decline in new investor activity, a 20% drop in real estate transaction volumes, and stagnant home price growth across capital cities this year. Capital city sales have already decreased by 17%, from 32,863 in May 2025 to 27,342 in May 2026. Ray White chief economist Nerida Conisbee described the market as ‘seized up,’ with buyers shifting from urgency to caution. Fewer bidders are attending auctions, open-home attendance has softened, and some purchasers are delaying decisions to monitor interest rates, budget changes, and broader economic conditions. Loan Market data reflects this trend, with investor mortgage applications down 23% and first-home-buyer applications falling 12% by late May. On the ground, real estate agents report fewer inspection groups, with Rebecca Cuderman of NGU Real Estate’s Logan office noting a drop from seven to eight groups per inspection to just two or three. Buyers are now more price-sensitive and hesitant, reassessing borrowing capacity and questioning future rate hikes. Melbourne-based mortgage broker Jake Mold suggests that as investor competition cools, first-home buyers may return, particularly for existing properties. The tax changes—replacing the 50% capital gains tax discount with inflation indexing—are expected to reduce investor borrowing capacity by 10% to 20%. Ms Cuderman said investors are pausing to understand long-term implications before adjusting their strategies. The combined effect of higher rates and tax reforms has created a period of uncertainty, leaving both investors and first-home buyers on the sidelines.