The number of investment approvals fell by more than 22 per cent to 5284 in 2024/25, the Productivity Commission found in its annual trade and assistance review.
The decrease was almost entirely attributable to the fall in residential real estate approvals, it said.
In the May budget, the Albanese government extended the ban on foreign purchases of existing homes by two years and three months until June 2029.
But with the ban not coming into force until April 2025, the Productivity Commission said the full impact would not be seen until the next financial year.
The value of foreign investment into Australia still grew by 32 per cent to $256.4 billion in 2024/25 with commercial approvals accounting for 98 per cent of the total value.
The figures came as parliament passed legislation ensuring foreign residents also had to pay a 30 per cent tax on capital gains.
The laws included an amendment initiated by the crossbench extending a 15 per cent capital gains tax concession for foreign investors in renewable energy projects by an extra 10 years, so as not to discourage investment in Australia's energy transition.
"After consulting with stakeholders, we're providing a concessional period for these investments to 2040 to more closely align with the investment horizons typical of renewable energy projects," Treasurer Jim Chalmers said in a statement.
Francesca Muskovic, policy director for the Investor Group on Climate Change, said the amendment removed uncertainty for investors.
"This change avoids what would have been an unforced error in cruelling desperately needed investment - to drive down pressure on energy prices and help grow new industries supported by cheap clean energy," she said.
The Productivity Commission's report found the government's flagship Future Made in Australia agenda, aimed at boosting investment in projects like clean energy and minerals refining, drove a 6.4 per cent increase in industry budgetary assistance to $16.8 billion in 2024/25.
Instead of broad-based funding towards things like research and development, government assistance was increasingly being targeted at specific industries, which could create market distortions by favouring specific parts of the economy over others, the report warned.
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