Australia’s housing market could be heading towards its biggest price correction in more than four decades, according to one of the country’s leading housing economists, who argues recent tax changes targeting property investors have arrived at the worst possible moment for an already weakening market.

Leith van Onselen, Chief Economist at MacroBusiness and a former Australian Treasury economist, believes the combination of higher interest rates, weakening consumer confidence, rising unemployment and major tax reforms affecting investors could accelerate a national housing downturn beyond anything experienced in recent decades.

Speaking on the Follio Property Podcast, van Onselen predicted Australia was likely to experience its largest national house price correction in more than 40 years.

“I think we’re going to have the biggest property price correction in 40 years,” he said.

He noted that property analytics firm Cotality records the largest national housing downturn over that period as an 8.2 per cent decline, but said he believes the coming correction could exceed that figure if current economic conditions persist.

Van Onselen argued the impact would not be evenly spread across the market.

“The bottom 40 per cent could hold up pretty well. It’ll be the sort of higher end that’ll probably get spanked,” he said, suggesting premium suburbs and expensive homes may experience larger price declines than more affordable segments.

The warning comes only months after the Albanese Government unveiled sweeping reforms to Australia’s long-standing negative gearing and capital gains tax (CGT) arrangements as part of its housing affordability agenda.

Under the reforms, investors purchasing established residential properties after the May 2026 Budget will no longer be able to offset rental losses against wage income from 1 July 2027. Instead, those losses can only be offset against income or capital gains from residential property. Existing investment properties purchased before the Budget announcement are grandfathered, while newly built homes remain exempt in an effort to encourage additional housing supply.

The Government has also replaced the traditional 50 per cent capital gains tax discount for future investments with a new inflation-indexation model and a minimum tax framework, although investors in qualifying new-build homes will retain more favourable tax treatment.

Labor says the changes are designed to reduce investor demand for existing housing while directing investment towards new construction, improving opportunities for first-home buyers and expanding housing supply over time.

Van Onselen, however, believes the reforms have been introduced at precisely the wrong point in the property cycle.

“The capital gains and negative gearing changes to property are very poorly timed,” he said.

He argued the housing market had already reached a cyclical peak before the reforms were announced.

“We’ve got a housing market that is at a cyclical peak, the RBA has just hiked rates three times, we’ve got the highest cash rate in 15 years, and financial markets think it’s going to go higher again.”

According to van Onselen, deteriorating economic conditions—including weaker consumer sentiment, geopolitical uncertainty arising from conflict in the Middle East and rising unemployment—were already placing downward pressure on housing values before the policy changes added another headwind.

His comments reflect growing concern among some market analysts that higher borrowing costs are beginning to outweigh years of exceptionally strong housing demand.

After more than two decades of largely uninterrupted price growth, Australia’s housing market has entered a more challenging period as elevated mortgage repayments reduce borrowing capacity and buyers become increasingly cautious.

The Reserve Bank’s monetary tightening has significantly lifted financing costs since the historically low interest rate environment that followed the COVID-19 pandemic.

Although population growth has remained relatively strong, affordability has deteriorated substantially across many parts of the country, particularly in Sydney, Melbourne and Brisbane.

Van Onselen also challenged the widely held belief that migration has been the principal driver of Australia’s long-term house price boom.

Instead, he argued that easy access to credit and historically low interest rates have played a much larger role in pushing values higher over recent decades.

That view has been supported by some housing economists who argue credit availability exerts a stronger influence on house prices than population growth alone, although economists remain divided over the relative importance of the various factors affecting housing demand.

As part of his warning, van Onselen pointed to New Zealand as an example of how similar investor-focused tax changes can influence housing markets.

New Zealand introduced tighter restrictions on property investors before experiencing a significant decline in house prices as higher interest rates and weaker demand combined with policy changes.

Subsequent governments have since reversed or modified several of those measures following concerns about their broader economic impact.

“They’ve had a property price crash. Now the new government’s come in and totally undone all their rules,” van Onselen said.

“I wouldn’t be surprised if we end up following New Zealand at some point.”

While his assessment has attracted attention, not all analysts agree that Australia is heading towards such a severe downturn.

Some economists argue the reforms have been deliberately structured to minimise market disruption through extensive grandfathering arrangements, transitional periods and exemptions for newly built housing.

Treasury has consistently argued that redirecting investor demand away from existing homes and towards new construction should increase housing supply over the longer term while improving affordability for owner-occupiers.

The legislation also preserves existing tax treatment for millions of Australians who already own investment properties, limiting the reforms primarily to future purchases rather than existing portfolios.

Nevertheless, some banks, brokers and property analysts have reported a noticeable slowdown in investor activity since the reforms were announced.

Several market forecasts anticipate investor demand will weaken ahead of the July 2027 implementation date, although opinions differ on the likely magnitude of any price correction.

Westpac has forecast a substantial decline in investor participation over coming years, while some mortgage brokers say many prospective investors are delaying purchases until there is greater certainty about future market conditions.

At the same time, other analysts argue that reduced investor competition may create better opportunities for first-home buyers, particularly in lower and middle-priced suburbs where affordability has been most constrained.

The ultimate impact of the reforms will depend on several factors beyond tax policy alone, including future Reserve Bank interest rate decisions, employment conditions, migration levels, housing construction and broader economic growth.

Housing markets have historically responded to multiple forces simultaneously, making it difficult to attribute price movements to any single policy change.

For homeowners and prospective buyers, the coming 12 to 24 months are likely to provide the clearest indication of whether Australia’s property market is entering a temporary cyclical correction or a more significant structural adjustment.

Van Onselen believes the risks are becoming increasingly evident, particularly for expensive properties where investor participation has traditionally been strongest.

The Albanese Government, however, maintains that its reforms are intended to improve housing affordability over the long term by encouraging investment that expands housing supply rather than increasing competition for existing homes.

As debate continues, Australia’s housing market now finds itself at the centre of one of the country’s most closely watched economic policy experiments, with homeowners, investors, lenders and first-home buyers all closely monitoring whether the reforms deliver their intended outcomes—or whether they deepen the market correction forecast by some economists.