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Sydney and Melbourne are forecast to lead the downturn, with dwelling values in the two cities predicted to decline by between 6 and 7 per cent.
The lender’s June Housing Monitor found dwelling price growth had already been slowing ahead of the federal budget, with reforms to capital gains tax and negative gearing expected to accelerate the downturn.
National Australia Bank (NAB) said the changes, which reduce incentives for investment in established housing, were coming at a time when higher interest rates and broader economic uncertainty were already weighing on the market.
National dwelling prices were flat in May, marking the softest monthly result since late 2024.
Sydney and Melbourne drive slowdown
The slowdown has been most pronounced in Australia’s two largest housing markets.
NAB’s data found that Sydney dwelling prices fell 0.9 per cent over the month, while Melbourne prices declined 0.8 per cent.
NAB said that both cities are now recording price falls on a six-month annualised basis, in contrast to many of the mid-sized capitals where values continue to rise despite a moderation in growth.
Cities such as Perth have seen a slowdown, but brokers on the ground are still reporting strong fundamentals in the market and robust sale prices.
While dwelling prices nationally remain 8.8 per cent higher over the past year, NAB said “a more pronounced downturn cycle is now likely”.
In the report, NAB economists said: “Reforms to CGT and negative gearing that reduce incentives for low yielding/high debt investment in established property and come against a backdrop of higher interest rates and elevated uncertainty which had seen the beginnings of a downturn in house prices.”
NAB’s data found the median dwelling value to be around $940,000.
Investors expected to pull back
The bank also expects investor activity to weaken as the impact of the federal government’s housing tax reforms begins to flow through to the market.
The value of new housing loan commitments fell 3.8 per cent in the March quarter, with NAB forecasting investor lending to slow further in the months ahead.
“We expect new housing commitments for investors to slow further and growth in the overall stock of outstanding investor credit to slow sharply from the current pace of around 10 per cent year-on-year,” the report said.
Similarly, Westpac economists have already forecast that new investor activity could fall 34 per cent in the near term, while total housing market turnover is expected to decline by 20 per cent.
Despite the softer outlook, housing loan arrears remain low at around 1 per cent of outstanding loans.
On the owner-occupier side, mortgage demand has also begun to soften. Data from credit reporting agency Equifax showed annual growth in mortgage demand slowed from 10.7 per cent in January to a 0.9 per cent decline in April, before falling 6.6 per cent in May.
Construction pipeline elevated
NAB said that housing supply continues to face challenges despite an increase in dwelling approvals and construction activity.
The bank said that dwelling starts have lifted since late 2023, led by apartments and town houses, but completions have struggled to keep pace.
As a result, around 235,000 dwellings remain under construction, approximately 35 per cent above the pre-pandemic average.
Construction firms continue to report labour shortages, while rising construction costs and planning delays remain key barriers to getting new housing projects underway.
[Related: Brokers weigh impact of ‘new normal’ rate environment]
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