Key takeaways
New modelling estimates the Federal Budget’s property tax changes could result in 10,700 fewer homes being built by 2029-30.
The modelling forecasts rents could rise by an additional $10 a week each year, separate from inflation.
Treasury estimates the rental impact will be less than $2 a week and argues its wider housing measures will add more than 30,000 homes over a decade.
The policy may help some first-home buyers face less investor competition, but reducing rental investment during a severe housing shortage carries substantial risks.
Established property will remain an important investment asset, although future investors will need to pay much closer attention to cash flow, finance structures and asset selection.
Australia’s housing crisis has always been a supply crisis.
We simply don’t have enough homes for our growing population, construction costs remain too high, builders are struggling to make projects viable, and rental vacancies are already at critically low levels.
Against that background, you would expect every government policy to encourage more people to invest in housing and help finance the construction of new homes.
Instead, the Federal Government’s latest tax changes appear likely to discourage investment, reduce construction and place further upward pressure on rents.
New economic modelling commissioned by four of Australia’s leading property bodies suggests the changes could result in 10,700 fewer homes being built by 2029-30, eliminate thousands of construction jobs and wipe almost $1 billion from economic activity.
If those estimates prove even broadly correct, renters will bear much of the cost.
What is changing?
From 1 July 2027, negative gearing will generally be restricted to newly built residential properties, while properties held before the Budget announcement remain grandfathered.
The Government is also replacing the 50 per cent capital gains tax discount with inflation-based indexation and introducing a minimum 30 per cent tax rate on real capital gains.
Investors buying eligible new dwellings will retain access to negative gearing and more favourable capital gains tax treatment. The Government has also negotiated a ban on SMSFs borrowing to purchase residential property.
These changes are intended to redirect investors towards new housing and reduce competition for established homes, but the market may not respond as neatly as the Government expects.
The new modelling paints a worrying picture
The Real Estate Institute of Australia, Property Council of Australia, Master Builders Australia and the Housing Industry Association commissioned updated modelling from Qaive and Tulipwood Economics.
It estimates that the combined tax changes could result in almost 10,700 fewer homes being built by 2029-30.
About 2,000 of those lost dwellings have been attributed to the ban on SMSF borrowing, which the modelling suggests could also remove more than 800 construction jobs and reduce GDP by almost $200 million.
Across all measures, the estimated effect is 4,700 fewer construction jobs and a reduction of almost $1 billion in GDP over four years.
Tulipwood Economics director Joe Branigan said the SMSF ban removed a source of finance from a market that is desperately in need of more investment.
The broader industry argument is that Australia can’t resolve a housing shortage by making housing harder to finance, build and own.
Renters could be the unintended casualties
Treasury estimates that the negative gearing and capital gains tax changes will increase rents by less than $2 a week for a household paying the current median rent.
The property industry’s modelling suggests a much larger figure, estimating that the changes could add around $10 a week to rents each year, separate from inflation.
In fact, I think it will be more than that, meaning that over several years this will become a significant burden for tenants already dealing with sharply higher living costs.
Of course, landlords can’t simply increase rents by whatever amount they choose. Rents are set by what tenants can afford and by the balance of supply and demand in each market.
However, when vacancy rates are exceptionally low and tenants have few alternatives, higher ownership costs are more likely to be passed through to higher rents.
The tax changes also affect the supply side of that equation.
If fewer investors purchase rental properties, fewer rental homes will be available. If fewer projects proceed because presales and investor finance dry up, future supply will also be reduced.
That is where I see the government policies backfiring.
We should be careful about blaming today’s rents on tomorrow’s tax rules
Some commentators have suggested that rent increases since the Budget prove the policy has already failed.
I think there's more to it than that.
Most of the tax changes do not take effect until July 2027, and current rental increases are still largely driven by the shortage of available accommodation, population growth, higher interest costs, increased rates and taxes, and the rising cost of maintaining a property.
However, property markets are forward looking.
Investors make decisions today based on the returns, risks and tax treatment they expect over the next five, ten or twenty years. Developers also rely on investor presales to obtain finance and begin construction.
Therefore, these policies can affect investor sentiment and new housing commitments well before their formal starting date.
The genuine test will be what happens to investor lending, development approvals, project commencements, rental listings and vacancy rates over the next few years.
Why directing investors into new property may not work
The Government assumes investors who no longer find established property attractive will redirect their money into new housing.
Some will, but many won’t.
New apartments and house-and-land packages often come with a substantial developer’s margin, limited scarcity and a higher risk of underperformance. Investors may also worry about construction delays, builder failures and defects.
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There is another problem that has received insufficient attention.
The tax advantages attached to an eligible new property will not pass to the next investor who buys it. Treasury’s tax explainer says a subsequent purchaser generally can’t access the same negative gearing and capital gains tax concessions.
That could reduce the property’s appeal in the resale market.
A strategic investor will consider the eventual buyer of their property before purchasing it. If the future pool of buyers is smaller or less willing to pay a premium, the initial tax benefit may be offset by weaker capital growth or a lower resale price.
Rather than buying a new property they would otherwise avoid, some investors may decide to invest in shares, commercial property or other assets where the tax treatment and returns are more attractive.
First-home buyers may gain, but the story doesn’t end there
Treasury expects the reforms to produce around 75,000 additional owner-occupiers over the next decade and temporarily reduce property price growth by about two percentage points.
Some established properties that would previously have been bought by investors will undoubtedly be purchased by first-home buyers instead.
That improves home ownership for those households, but it doesn’t create another dwelling.
A rental property simply changes tenure and becomes an owner-occupied home. One first-home buyer gains a residence while the tenant who previously occupied the property must find another rental.
This reshuffling may improve the home ownership rate, but it does little to solve the underlying shortage.
It could also make life harder for people who can’t buy, including younger Australians saving a deposit, recently separated families, lower-income households, new migrants, and people who need flexible accommodation.
Around one-third of Australian households rent, and they can’t be treated as collateral damage in the pursuit of higher home ownership.
The construction target is already slipping away
Australia’s National Housing Accord aims to deliver 1.2 million well-located homes over the next five years to June 2029.
That means completing an average of 240,000 dwellings per year, a level Australia has never sustained.
The construction industry is already constrained by labour shortages, expensive materials, lengthy approval processes, planning restrictions, and development projects that are financially unviable.
The Housing Industry Association believes the eventual impact of the tax changes could be even greater than the commissioned modelling suggests, with estimates of as many as 40,000 fewer homes being built over the coming decade.
At a time when Australia needs unprecedented construction, losing thousands of potential dwellings takes us further away from the Government’s target.
Property investors are part of the housing solution
Property investors have become politically convenient targets, yet they provide most of the rental accommodation in which Australians live.
Governments and community housing providers lack the financial capacity to replace private landlords on anything like the scale required.
This doesn’t mean every existing tax setting should remain untouched forever. A sensible government should review whether policies are meeting their objectives and whether the benefits are distributed fairly.
However, major changes need to be judged against one practical question: will they help Australia finance and build more homes?
Any reform that reduces rental investment during a housing shortage needs especially careful scrutiny.
What does this mean for property investors?
Existing investors who acquired properties before the Budget announcement have an important advantage because their negative gearing arrangements are grandfathered.
That could make well-located, established investment-grade properties more tightly held over time.
Future investors will need to be much more selective. Cash flow will matter more, financing structures will need to be carefully considered, and the distinction between investment-grade established property and developer-driven new stock will become even more important.
I would also be cautious about rushing into a new property purely to obtain a tax concession.
Tax should form part of an investment decision, but the property still needs the right location, scarcity, owner-occupier appeal and long-term capital growth prospects.
Australia will continue to grow, people will continue to need somewhere to live, and our chronic shortage of well-located housing will not disappear.
Unfortunately, these tax changes could make that shortage worse before policymakers recognise the unintended consequences.
And if that happens, property investors will not be the only people affected. Renters will once again be left paying the bill.
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