A major bank’s third-quarter update shows investor mortgage applications fell 20% in the three months to June, with total housing credit growth forecast to drop from 6.8% this year to 4.7% in 2026. The bank’s shares fell 5.9% on the day, the worst single-day drop since April, dragging the rest of the sector down with it. The driver: negative gearing changes announced in May that strip tax deductions from established-property purchases, cutting investor borrowing power by 10–20% depending on income.
The same pattern is showing up across the sector. Another major reported mortgage applications down 15% for the June quarter, with application values off 9%. A third bank’s economists have cut their December 2026 price-growth forecast from 5% to 3%, citing the policy change. The consensus among bank executives: annual credit growth that was running at 8–9% is now tracking closer to 5–6%.
The mechanics of the drop
Since May, all four major banks have rewritten how they treat negative gearing in serviceability calculations. The rule is consistent: loan contracts signed on or before 12 May keep negative gearing counted in borrowing power. Anything signed after that date only gets the deduction if the property is a new build. For established purchases, the tax benefit is gone from the calculator.
The impact on borrowing capacity is material. An investor on a 37% marginal tax rate loses roughly 10–15% of borrowing power. Higher earners or multi-property owners can see cuts above 20%. One broker worked an example: a client earning $100,000 with no existing debt previously qualified for $750,000 in investment lending. Post-change, that number falls to $600,000, a 20% reduction from losing negative gearing alone.
One bank went further in late May, instructing brokers to edit and resubmit affected loan files for reassessment even if they were already in the pipeline. Approval timelines have slowed as lenders tune their models, and the legislation still hasn’t passed Parliament, so more adjustments are likely.
Key numbers
- Investor mortgage applications down 20% at one major bank in Q3 2026
- Total housing credit growth forecast to fall from 6.8% to 4.7% next year
- Borrowing capacity cut by 10–20% for most investors, over 20% for high earners
- One major’s investor housing credit growth expected to halve: 9.1% this year to 4.5% in 2027
- Bank share prices fell 2–6% on the day the update dropped
Who it hits and where
The impact concentrates in apartments and lower-priced segments, where investor activity runs highest. Investors made up roughly 35% of mortgage volumes before the policy shift; that share is compressing fast. First-home buyers and new-build purchases are holding up as the relative bright spots, but they’re not large enough to offset the investor retreat.
For anyone holding a pre-12 May contract, the old rules still apply, negative gearing stays in the borrowing-power calculation. But for deals signed after that cutoff, established-property purchases now need to be modelled without the tax benefit unless the property qualifies as a new build under the legislation. The grandfathering creates a hard line in the market: anything locked in before mid-May got through under the old settings, and everything after is being assessed on the new, tighter standard.
The broader economy feels this through two channels. Lower lending growth slows housing construction, consumer spending and GDP, construction employs one in ten workers, and mortgage debt drives a large share of household consumption. But it also reduces inflation pressure, which lowers the probability of further RBA rate hikes. The bank CEOs are threading that line carefully: population growth and housing undersupply should provide some offset, but the volume numbers show the policy drag is real and immediate.
What shifts the trajectory
Three variables could change the outlook. First, the RBA. If inflation stays under control and the central bank cuts rates in the second half of 2026, borrowing capacity improves across the board and some of the policy-driven loss gets clawed back. Second, the legislation itself. It hasn’t passed Parliament yet, and amendments or grandfathering extensions could soften the impact. Third, new-build supply. If developers can lift apartment completions fast enough to meet the surge in first-home buyer and new-build investor demand, total credit growth stabilises at a lower level rather than continuing to slide.
The risk case: credit growth keeps compressing, construction activity stalls, unemployment ticks up, and the RBA is forced to cut rates in response to a demand shock rather than because inflation is durably under control. That’s the scenario bank economists are now actively modelling, and it’s why investor retreat is a central variable in 2026 housing forecasts.
What this means if you’re borrowing
If you signed a contract before 12 May, confirm your paperwork clearly supports that date, lenders are checking. For anything signed after, model your borrowing capacity without negative gearing unless you’re buying a qualifying new build. Expect slower approval times as banks keep adjusting their systems, and don’t assume the policy settings are final, Parliament hasn’t passed the legislation yet, so more changes are possible.
For investor clients, the choice is starker now: accept lower leverage and smaller purchases, shift to new builds to retain the tax benefit, or sit out until rates fall or the policy shifts. The volume data shows most are choosing the third option. For owner-occupiers, the investor pullback is creating less competition in established stock, but it’s also reducing the secondary supply that renters eventually buy into, which tightens the pathway from renting to owning over time.
The scenario no one’s pricing yet
The consensus view is that credit growth bottoms around 4–5% and stabilises there. That assumes the RBA cuts rates, new-build supply ramps up, and the policy doesn’t tighten further. The tail risk: none of those three happen on schedule. The RBA holds rates higher for longer because services inflation stays sticky. New-build approvals stay flat because construction costs and planning delays haven’t eased. Parliament passes the negative gearing changes without amendments and adds a capital gains adjustment on top.
In that scenario, credit growth falls below 4%, house prices turn negative in 2027, and the banks face a margin squeeze as loan volumes contract while funding costs stay elevated. It’s not the base case, but it’s the scenario that explains why short positions against Australian banks have spiked to $11 billion and why bank shares sold off 6% in a single session on what looked like a relatively routine quarterly update. The market is pricing the risk that this policy change is the circuit-breaker that tips credit growth from slow to stalled.
One clear step
If you’re advising or assessing an investment purchase signed after 12 May, run the numbers twice: once with negative gearing (if it’s a qualifying new build) and once without (if it’s established stock). The gap between those two figures is your real borrowing-capacity constraint under the new rules. For contracts signed before the cutoff, keep the documentation locked down, lenders are scrutinising dates as they reassess files. If approval timelines blow out or your borrowing power comes back lower than expected, it’s not a calculation error, it’s the new serviceability standard in real time.
Subscribe to Australian Property Review’s free weekly newsletter for credit, policy and market updates that cut through the noise.
General info, not financial advice.
