Loan approvals fell sharply through the June quarter even though the Reserve Bank kept the cash rate on hold, signalling that something beyond the official rate is now limiting credit flow. Investor loan commitments dropped 8.6 per cent over the three months to June, the steepest fall since September 2022, while first-home buyer numbers also declined despite average loan sizes rising 10 per cent year-on-year.
At the same time, national dwelling values fell 0.7 per cent in July and 1.9 per cent over the quarter, the largest declines since December 2022, while total listings climbed to 278,984, up 22.8 per cent on the year prior and the highest since 2020. Median days on market stretched to 44, up from 27 a year earlier, and vendor discounting widened to its largest margin since May 2023.
The mismatch between falling credit and rising stock points to borrowing capacity hitting a ceiling independent of whether the RBA moves again.
Where the credit squeeze is biting hardest
Investor lending took the sharpest hit, with commitments falling more than eight per cent in a single quarter. Federal budget changes to negative gearing and capital gains tax, announced in May and legislated in June, removed much of the after-tax return that supported leveraged purchases. At the same time, the ban on limited recourse borrowing for residential property inside self-managed super funds, effective 10 August under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, closed a channel industry estimates suggest was substantially larger than Treasury’s original projections.
First-home buyers also pulled back in absolute numbers, though those who did borrow took larger loans. The 10 per cent year-on-year increase in average loan size reflects entry prices still well above pre-pandemic levels in most metros, meaning deposits and servicing buffers have stretched in tandem.
Refinancing activity also declined, suggesting existing borrowers see little room to improve their position and lenders are applying tighter serviceability tests even on switchers.
Why the pause didn’t unlock demand
The RBA held the cash rate at 4.35 per cent for a second consecutive meeting in August, yet loan approvals continued to slide. Two forces explain the divergence.
First, serviceability buffers are calculated at rates well above the actual cash rate, typically 3 percentage points higher, which means a household assessed today faces a hypothetical 7.35 per cent test rate even though the actual mortgage rate sits closer to 6.5 per cent. As wages growth has slowed and cost-of-living inflation remains elevated, fewer households clear that buffer.
Second, policy changes have shifted the risk-return calculus for leveraged property. Negative gearing changes reduced the post-tax benefit of holding loss-making investments, while the SMSF borrowing ban removed a structure that allowed retirees and near-retirees to use super balances as equity without breaching contribution caps. Lending that was viable under the old settings no longer stacks up, regardless of the cash rate.
**Key numbers**
– Investor loan commitments fell 8.6% in the June quarter, sharpest drop since September 2022
– National listings reached 278,984 in July, up 22.8% year-on-year, highest since 2020
– Median days on market stretched to 44 days, up from 27 days a year earlier
– Dwelling values fell 1.9% over the quarter to July, largest decline since December 2022
– First-home buyer average loan size rose 10% year-on-year despite lower approval numbers
The spring supply test
Listings typically peak in spring, and this year’s increase is starting from an already elevated base. If buyer numbers remain constrained by serviceability limits and policy uncertainty, the imbalance will widen further. Vendors who need to sell, relocations, separations, estate settlements, will face deeper competition and longer campaigns, likely forcing additional price concessions.
The risk scenario is a feedback loop: falling prices erode equity, which tightens credit further as loan-to-value ratios rise and banks pull back, which in turn reduces buyer competition and pressures prices again. That loop doesn’t require further RBA tightening to activate, it runs on credit availability alone.
The base case is a slower grind: listings remain elevated, clearance rates drift lower, and prices ease another 2 to 4 per cent by year-end as sellers adjust expectations downward.
What would tighten or loosen the constraint
Three variables determine whether this eases or intensifies.
Wages growth above inflation would restore some serviceability headroom, but the current trajectory points to real wages growing only marginally, if at all. A reversal of the negative gearing or CGT changes is politically unlikely before the next election cycle, and even then faces uncertain passage. An RBA rate cut would lower the serviceability buffer and the actual repayment, but the bank’s own forecasts still allow for one further increase before cuts begin, and the market is pricing no cuts until mid-2027 at the earliest.
On the tightening side, any further erosion in employment conditions, even a small uptick in unemployment, would reduce both borrowing capacity and buyer confidence. A sharp fall in auction clearance rates or a wave of distressed listings would signal a more disorderly adjustment.
What it means if you’re deciding now
If you’re relying on leverage, assume serviceability is the binding constraint, not the advertised rate. Run scenarios at 7.5 per cent, not the current mortgage rate, and stress-test your repayment buffer against a 10 per cent income reduction or a six-month gap in rental income if you’re buying investment property.
If you’re selling, price for the market that exists now, not the one from six months ago. Median days on market have stretched by 63 per cent year-on-year, campaigns are slower and discounting is wider. The longer a property sits, the more equity you give up in eventual price.
If you’re holding and waiting for a clear turn, watch loan approval volumes and clearance rates, not just the RBA. Credit is the earlier signal. When approvals stabilise or tick higher for two consecutive months, buyer capacity is returning. Until then, assume the constraint is structural, not cyclical.
For a detailed breakdown of how the SMSF borrowing ban interacts with the broader tax changes, see [SMSF property holdings face new tax from July 2026](https://www.apreview.com.au/smsf-property-holdings-division-296-tax-2026/). Metro-specific price movements and how policy layers are compounding across Sydney and Melbourne are tracked in [Sydney home prices drop sixth month as rate hikes meet investor tax](https://www.apreview.com.au/sydney-home-prices-drop-sixth-month-rate-hikes-investor-tax/) and [Melbourne house prices fall below 2021 levels as policy layers compound](https://www.apreview.com.au/melbourne-house-prices-fall-below-2021-policy-layers/).
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General info, not financial advice.
