Key takeaways
Treasury told renters the negative gearing and CGT changes would add less than $2 a week to the median rent.
Even the economist whose work underpinned Labor's policy now expects rents to rise 10-15% over the next two years.
Investor lending, investor buying intentions and the new housing pipeline are all heading the wrong way for tenants.
Rental growth has slowed in recent months, but that is due to affordability and higher interest rates, because tax impact plays out over years.
Back in May, tucked away on page 158 of Budget Paper No. 1, Treasury made a promise to Australia's renters.
It said the government's changes to negative gearing and capital gains tax were "likely to have a small impact on rents," with an expected increase of less than $2 a week for a household paying the median rent.
That's about the cost of a cup of coffee each fortnight, and the Treasurer has stuck with that figure ever since, even as one bank after another, independent economists and the architect of the policy itself have said it's far too low.
I've been watching property markets for decades, and in that time I've learned that when you change the incentives for the people who supply a product, the price of that product changes.
Rental housing is no different, and in my opinion the $2 figure will go down as one of the more optimistic forecasts in recent budget history, for reasons I'll explain below.
What Treasury actually said
To be fair to Treasury, it's worth being clear about what the $2 figure means.
It's an estimate of the extra rent a median household would pay because of the tax changes, on top of whatever rents would have done anyway.
So when I see headlines comparing the $2 to the $40 or $50 rises tenants have copped in some suburbs over the past year, I think that overstates the case, because plenty of other factors push rents around, including population growth, interest rates and plain old supply and demand.
Cotality's latest Quarterly Rental Review shows national rents are up 5.5% over the past year, which is roughly $37 a week. Very little of that can be pinned on a policy that doesn't even take effect until July 2027.
That said, I still think the $2 figure is badly understated, because of the assumptions underneath it, and how they ignore the way investors and tenants actually behave.
Even the policy's architect thinks it's wrong
The most telling comment on the $2 estimate didn't come from the property industry.
It came from UNSW economics professor Richard Holden, who wrote the 2015 McKell Institute report that formed the intellectual foundation of Labor's negative gearing policy.
Holden told The Nightly he expects rents to rise by around 10-15%, spread over 18 to 24 months as leases gradually roll over.
On today's national median rent of $713 a week, that's an extra $70 to $105 a week, or somewhere between $3,700 and $5,500 a year for a typical tenant, which is a long way from $2.
NAB's head of Australian economics Gareth Spence went further in August, publishing a scenario in which Sydney and Melbourne rents rise 25-30% over two years, and his reasoning came down to simple maths.
Investors who buy established property after budget night can no longer use rental losses to reduce their tax on wage income, so they'll need a higher rental yield to make the numbers work - NAB assumed gross yields in Sydney and Melbourne would need to rise to somewhere between 3.5% and 4.5%.
If property values stay flat, the only way to get there is through higher rents, and Spence concluded the adjustment would "likely require a combination of both higher rents and lower dwelling values."
The Treasurer was quick to point out that NAB's note was a scenario rather than a forecast, and that's a fair point.
But former Treasury economist Peter Downes, now at Outlook Economics, has also modelled the changes and estimates rents could be around 6% higher by 2029, adding up to $2,000 a year to the typical rent bill.
Even the industry-commissioned modelling by Qaive and Tulipwood, which the government dismissed as the work of "vested interests," found rents would be $9 a week higher by 2029-30, which is still more than four times Treasury's number.
In the interests of balance, the Grattan Institute estimated a rise of just $1 a week, and the CIS's Peter Tulip thinks Treasury's $2 is plausible.
So the economists are split, but I'd point out that the people closest to how rental markets actually function, the ones watching investor behaviour week by week, are almost all on the higher side.
Where Treasury's modelling falls down
The government's main defence of the $2 figure is grandfathering.
Existing investors keep their negative gearing, the argument goes, so they have no reason to raise rents or sell up.
The trouble is that this treats the rental market as if it were frozen in time.
Every year, thousands of investors sell for ordinary reasons such as retirement, divorce, a change in circumstances, or simply needing the cash. Under the old rules, many of those properties were bought by another investor and stayed in the rental pool.
Now those properties are far more likely to be bought by owner-occupiers, because a new investor buying an established home no longer gets the same tax treatment.
Treasury Secretary Jenny Wilkinson was quite open about this in her post-budget address, saying owner-occupiers are projected to own around 75,000 more homes over the next decade than they otherwise would.
That's the intended outcome, and helping more Australians into home ownership is a worthy goal.
But every one of those homes is a rental that leaves the market, and the pressure falls on the remaining tenants, particularly those who aren't in a position to buy.
- Also read:Melbourne housing market update | November 2026
- Also read:Sydney housing market update | November 2026
- Also read:Australian housing market update | November 2026
- Also read:Latest Property Price Forecasts. Australian Property Market Outlook 2026-2027: Navigating a Market Correction
- Also read:Brisbane Property Market Forecast [2026 & Beyond] – What The Olympics Decade Means for Investors.
The investors are already heading for the exit
We don't have to wait until 2027 to see this happening, because investors are responding to the incentives right now.
The Property Investment Professionals of Australia's 2026 Annual Investor Sentiment Survey found 18.3% of investors sold at least one property in the year to August, the highest share on record and the third consecutive annual increase.
Only 27.8% said they intended to buy another investment property, down from 41% a year earlier, and 21.5% said they're unlikely to buy again unless the changes are repealed.
The ABS lending figures tell the same story, with new investor loan commitments falling.
The supply problem nobody wants to talk about
This is the part of the story that concerns me most, because its effects won't show up for two to four years.
Investors have traditionally bought a large share of off-the-plan apartments, and those presales are what get new projects financed and built.
Treasury's own budget papers acknowledged that the tax changes on their own would reduce new home construction by around 35,000 dwellings over a decade.
The government argues its $2 billion Local Infrastructure Fund will more than make up for that, delivering a net gain of 30,000 homes. Much of the disagreement between Treasury and the industry modelling comes down to whether you believe that fund will deliver 26,000 homes over four years or closer to 5,300.
I know which side of that bet I'd take, given how far behind we already are on the 1.2 million new homes target.
New builds still qualify for negative gearing, which is intended to redirect investors towards fresh supply. But when investor lending falls this sharply across the board, I'd expect less money flowing into both new and established properties.
Fewer new homes, combined with fewer established homes available to rent, is a recipe for tighter vacancy rates and higher rents down the track.
Why rents have cooled in recent months
If you've been following the data closely, you'll know rental growth has actually cooled in recent months as vacancy rates crept up a little.
I don't think that undermines my argument.
Rents can only rise as fast as tenants can pay, and right now tenants are stretched after years of big increases. The RBA has lifted the cash rate five times this year, and population growth has slowed.
That's an affordability ceiling at work, and it can hold rents back for a while, but it doesn't add a single home to the rental pool.
The tax changes work on the supply side over a much longer period, as investor-owned homes gradually transfer to owner-occupiers and fewer new projects get off the ground.
When population growth picks up again and interest rates eventually ease, those rental markets will be tighter than they otherwise would be, and that's when I expect the gap between Treasury's forecast and reality to become obvious.
What this means for property investors
For those of you who already own investment properties, this is a time to hold your nerve.
Your grandfathered properties retain their negative gearing benefits, and if I'm right about the rental market tightening over the next few years, you'll own a scarcer asset with rising rents.
Cotality notes that rental yields are now at their highest level since 2019, a reminder that while capital growth builds your wealth, cash flow is what keeps you in the game long enough to benefit from it.
I'd be very wary of selling in a panic, because a good investment doesn't become a bad one just because the tax rules for future buyers have changed.
For those looking to buy, the rules have changed but the fundamentals haven't.
Tax benefits have always been the icing on the cake, not the cake itself. The investors who will do best under the new rules are those who buy investment-grade properties in locations with strong owner-occupier appeal, because that's where both rental demand and long-term capital growth will be strongest.
Be careful about letting the remaining tax incentives push you into new-build stock in poor locations, because a tax deduction won't make up for a property that doesn't grow in value.
The bottom line
Treasury's $2 a week estimate assumed the rental market would barely notice a major change to how property investment is taxed.
In my opinion, that underestimates how investors respond to incentives, how quickly rental stock can leave the market and how long it takes to replace it.
Renters are unlikely to see a sudden spike tomorrow, but over the next few years I expect the cost of these changes to show up in their rent, and I suspect it will be measured in tens of dollars a week rather than a couple.
For investors, the message is to stay focused on quality, think long term and make sure your strategy is built around fundamentals rather than tax settings.
If you'd like to understand how these tax changes affect your own portfolio, and what you should be doing about it, the team at Metropole can help you build a strategic property plan that's designed to work under the new rules. You can book a time to chat at metropole.com.au.
