Real estate agents expect investor interest in established properties to crater after Tuesday's budget scrapped negative gearing and wound back the capital gains tax discount.
Investor activity was already cooling following three Reserve Bank rate hikes, uncertainty over the Middle East and expectations the budget would hit tax breaks.
Landlords have also been disempowered by state and territory reforms in recent years that have, rightfully, given more power to tenants, Cotality head of research Tim Lawless said.
"With all that in mind, I think that the cumulative effect of what you describe as disincentives for property investors is probably going to see a fairly sharp pullback in property investment," he told AAP.
Carve-outs for new builds will shift investors from the existing market, which attracts about 80 to 90 per cent of investor lending, according to data from the Australian Bureau of Statistics.
That would likely mean greater interest in house and land packages in the outer suburbs, given they tended to have higher growth potential than new apartments, and investors would still be looking for strong capital gains even with the lower tax discount, Mr Lawless said.
Grandfathering arrangements will prevent a sudden rush of investors to exit.
But over time, as investors sold out of established middle-ring suburbs, such as Annandale in Sydney's inner west or Clifton Hill in Melbourne's inner north, there would gradually be fewer investors coming in to take their place, Mr Lawless said.
"They potentially could be the markets where rental supplies just hollow out because you don't see very much of an influx of new investment coming into those markets to support rental supply and most investor demand is funnelled into inner city apartments or the outer fringe house market," he said.
Treasury forecast the combined impact of the tax changes would cause home prices to grow two per cent slower than they otherwise would have and support an extra 75,000 first home buyers in the first decade.
But shifts in sentiment could cause prices to fall more sharply in the short term, Commonwealth Bank economist Trent Saunders said.
Emma Bloom, Melbourne-based buyer's agent at Morrell and Koren, said sentiment was shot.
"Basically, the budget was like throwing a bucket of cold water over an already frozen market," she said.
Sellers, too, were likely to pause given the lack of confidence in the market, she said.
Fewer than 2000 auctions were scheduled across the combined capital cities this week, down from 2182 a week earlier and 2561 the week before that, Cotality data showed.
The trend is consistent with a slowdown in credit growth, with the Australian Bureau of Statistics reporting on Wednesday new home loan numbers fell by 6.2 per cent to 139,794 in the March quarter.
Amid the falling sentiment, Melbourne and Sydney have entered a downturn, falling another 0.6 per cent in April, Cotality data showed.
"Often in a rising market environment, people are keen to hurry and get on with it, because they figure they'll be paying more in a month's time if they don't," said Pete Wargent, director of AllenWargent property buyers.
"It seems to be definitely the opposite dynamic now, and people are like, 'well, I'm just going to wait and see what plays out before I make any big decisions'."
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