Housing Demand Softens as Rate Hikes and Confidence Slump Take Their Toll
Squeezed by renewed Reserve Bank of Australia (RBA) rate hikes and plunging consumer confidence, Australia's housing demand took a measurable hit in the March quarter. The latest ABS Lending Indicators reflect this shift, showing weaker activity than in December last year, with the total number of housing loan commitments falling by 6.2% and the overall value of lending dropping by 3.8%. Despite the quarterly slowdown, both measures remained higher than in March 2025, reflecting the tailwinds of the solid upswing in lending after last year’s rate cuts. A combination of factors has contributed to this cooling demand. Measures of housing affordability and mortgage serviceability were already looking stretched last year, even before the RBA started lifting interest rates—with two of the three hikes so far this year occurring in the March quarter. Consumer confidence surveys also plunged on the back of rising energy prices following the commencement of the Iran war in late February, with low confidence acting as a strong deterrence to high-value property purchases.
Owner-Occupiers Lead the Retreat, But Investors Not Far Behind
While all categories of property buyers recorded a quarter-on-quarter decline in lending activity, owner-occupier lending slowed more significantly than investment lending. The quarterly volume of owner-occupier loans fell by 6.9%, while the volume of investor lending was 5.3% lower. A similar trend was evident in value terms, with owner-occupiers down by 4.3% versus a 3.0% fall for investors.
Consequently, the investor share of total lending rose in March. In volume terms, the investor share reached a record high of 41.0%, based on a data series extending back to September 2019. In value terms, the investor share stood at 40.3%, its highest level since December 2016, a period just prior to APRA placing limits on investor-heavy interest-only lending.
Within the owner-occupier space, first home buyers demonstrated relative volume resilience compared to other owner-occupiers. However, this trend reversed in value terms, suggesting the average new loan size for first home buyers fell by around 2.6% in the March quarter, compared with a 1.6% increase for other owner-occupiers. This relative resilience in first home buyer volume may have been supported by the 5% Deposit Scheme.
- Owner-occupier loan volumes: Down 6.9% quarter-on-quarter.
- Investor loan volumes: Down 5.3% quarter-on-quarter.
- Investor share of lending volume: Reached a record high of 41.0% in March.
- Investor share of lending value: Rose to 40.3%, the highest level since December 2016.
Divergent State Trends
Lending trends varied considerably by state, reflecting differences in affordability, investor participation, local policy settings and market sentiment.
- Investor Lending: The overall decline in investor lending volumes was led by New South Wales, which held the largest share of investor lending at 43.9% in March, followed by Western Australia. Conversely, investor lending volumes increased in both South Australia and Tasmania, with Tasmanian investor loan volumes rising by almost 74% compared to the same period last year, albeit from a small base.
- First Home Buyers: The largest declines in first home buyer lending volumes were recorded in South Australia, down 6.1%, and Queensland, down 5.8%. Meanwhile, Tasmania eased by a modest 0.7% and Western Australia fell by 2.0%.
- Victoria: Victoria continues to lead national first home buyer activity as a share of total lending. This has been supported by Melbourne’s relative affordability advantage over other major cities, alongside state tax policy settings that discourage investors. However, this first home buyer share has softened in recent quarters as investor lending accelerated.
These divergent state-level outcomes suggest that national lending conditions are becoming more uneven, with local affordability, taxation policy and investor sentiment playing an increasingly important role in shaping borrower behaviour.
Sources: Australian Bureau of Statistics; State-level housing finance indicatorsMarket Outlook: Where is Lending Headed?
At a national level, the housing market sits on the cusp of a downturn. Dwelling values are already contracting in Sydney and Melbourne, while growth is slowing across mid-tier capital cities. Demand is expected to soften further as the full impact of recent interest rate tightening, particularly May’s hike, has yet to flow through to consumers.
There remains a distinct possibility that the Reserve Bank of Australia could lift rates further in the short term, given that trimmed mean inflation remains stubbornly above the central bank’s target range.
First home buyers tend to be more rate-sensitive than other market participants, meaning first home buyer lending activity may see a further slowdown in the coming quarters. This trend is likely to reverse once the Reserve Bank of Australia is eventually in a position to cut interest rates again, although the impact will remain uneven across different states based on local affordability.
Source: Reserve Bank of Australia – Monetary Policy Statements, 2026Investor Demand and Policy Implications
Recent policy changes introduced in the Federal Budget are expected to weigh on future investor demand and net new investor loans. The removal of negative gearing for existing property purchases will likely reduce investor lending. While some investors may pivot to newly constructed properties where negative gearing is retained, buyers have historically favoured established dwellings and may now look to alternative, non-property assets.
With capital city rental yields averaging just 3.4%, well below the current cost of borrowing, fewer investors purchasing existing properties will be able to generate positive cashflow. As a result, the costs of holding these assets are now substantially higher, exacerbating serviceability challenges and restraining overall market investment.
The broader implication is that investor demand may become more selective, with greater focus on cashflow, tax treatment, construction status and long-term capital growth prospects. This could gradually reshape lending patterns, particularly if borrowing costs remain elevated and policy settings continue to favour new housing supply over established stock.
Sources: Australian Treasury; Australian Bureau of Statistics; Reserve Bank of Australia