One of Australia’s biggest banks has significantly downgraded its outlook for house prices this year, in a clear signal that the combination of higher interest rates and the Federal Budget’s tax changes is reshaping the property market faster than expected.
Commonwealth Bank economists now expect national dwelling prices to be flat across 2026, a notable cut from their earlier forecast of 3 percent growth at Budget time and 5 percent back in March. For buyers, sellers, and anyone watching the market, it’s a meaningful shift in expectations.
What’s Driving the Downgrade
According to CBA senior economists, sentiment has softened in recent weeks following the Federal Budget’s changes to negative gearing and capital gains tax. They noted the tax changes have accelerated a slowdown that was already underway, with auction clearance rates falling since the RBA began its rate-hiking cycle, price growth continuing to slow, and sales activity softening.
The data backs this up. National home values were flat in May, with Sydney and Melbourne leading the downturn, both recording small monthly declines. Auction clearance rates have been tracking around or below 50% through much of recent weeks, a level historically consistent with the early stages of price falls. Homes are also taking longer to sell.
The Investor Pullback
One of the clearest effects is expected to show up in investor activity. CBA forecasts new investor lending could fall sharply over 2026, potentially to around half of late 2025 levels, reflecting lower expected returns under the new tax settings, tighter borrowing capacity, and more buyers choosing to wait and see.
This connects directly to the Budget changes: from 1 July 2027, negative gearing on established residential properties bought after Budget night will be restricted, and the 50% capital gains tax discount will be replaced by cost base indexation and a 30% minimum tax on capital gains for assets other than new builds. Newly built properties remain exempt, a deliberate design choice aimed at encouraging new housing supply.
Not a Crash, a Cooling
It’s worth keeping perspective. Most economists, including those at CBA, are describing this as a moderation rather than a crash. The bank noted that while the market’s reaction to the tax changes has been faster than expected, increasing the risk of a sharper near-term slowdown, the long-term impact remains modest compared with the bigger structural forces of interest rates, housing supply, and population growth.
Indeed, the market remains fragmented. While Sydney and Melbourne soften, cities like Perth, Brisbane, and Adelaide have held firmer, though they too are losing some momentum. Tight rental markets, low vacancy rates, population growth, and constrained new housing supply all continue to provide underlying support for values.
What to Watch
For now, auction clearance rates and listing volumes remain the clearest near-term indicators, particularly in Sydney and Melbourne where listings are already running above their long-term averages. With rates on hold but not ruled out from rising again, and the tax changes still settling in, the second half of 2026 will reveal how deep this cooling runs.
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