In October, loans approved for investment housing were down 6.1%, whereas approvals for owner-occupied housing rose 0.4%.
The housing market looks to be winding down due to the steep drop in investor lending activity.
The total number of home loans approved in October fell by 0.5%, and the value of total housing finance dropped by 2.0% in the month.
The value of loans that have been approved to investors is at its weakest since June 2014, said James McIntyre, head of Australian economics for Macquarie Group.
"There's been a really big swing in investor participation in the market, particularly since it peaked in April this year," McIntyre noted.
He also added that in three months, investor participation dropped down to almost 15%.
Michael Blythe, Commonwealth Bank of Australia chief economist, said that the stringent regulations pursued by the Reserve Bank and the Australian Prudential Regulation Authority (APRA) over the past 12 months are taking effect.
The APRA introduced the rules in late 2014 to reduce the number of risky loans in the market.
"There's the lift in lending rates to investors of course, and you're also seeing some signs of a natural slowdown coming through as well," Blythe observed.
RBC Capital Markets fixed income and currency strategist Michael Turner, however, warned that both housing finance and credit data have been susceptible to large revisions in recent months.
"The new price incentive for mortgage holders to classify loans as owner occupier, not investor, are muddying the water," Turner remarked.
McIntyre mentioned that current auction clearance rates and reduction in house price growth suggest that the market will continue to further slow down into the end of the year.
He also pointed out the recent rate hikes that were passed on November and what their impact could be on the market as a whole. McIntyre hinted that there could be further weakness on the investor front as a result.
McIntyre anticipates that through 2016 and into 2017, a combination of a weakening population growth and a huge supply pipeline would force the housing market to cool down even more.
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