Key takeaways
From 1 July 2027, negative gearing will generally be limited to newly constructed residential properties, while qualifying existing investments will remain grandfathered.
The reforms increase the annual cash-flow cost of buying an established investment property, particularly for highly geared investors on higher marginal tax rates.
Treasury estimates the reforms will add less than $2 a week to the current median rent, while Commonwealth Bank also expects a small and gradual impact.
Others suggest rents will rise considerably more. The widely reported $24,700 Sydney figure is the annual rental premium for some new dwellings over comparable established homes. It is not a forecast that an existing tenant’s rent will rise by $24,700.
This new-build premium still matters because future investors will be directed towards newer and generally more expensive rental properties.
Australia’s national rental vacancy rate was only 1.3% in July 2026, while national advertised rents were 7.2% higher than a year earlier.
Some renters will become homeowners, but many lower-income and long-term renters will remain in the rental market and compete for fewer affordable established properties.
The final impact on rents will depend on whether the reforms generate enough additional construction to offset weaker investor demand for established housing
Australia’s changes to negative gearing have been promoted as a way to give first-home buyers a better chance against investors.
While some aspiring homeowners will benefit from less investor competition for established properties, particularly apartments and more affordable homes, the policy is being introduced into a rental market that is already seriously undersupplied, and that creates a real risk for the millions of Australians who will remain tenants.
The concern is not that landlords will automatically add every dollar of lost tax benefits to the rent - rents are determined by supply, demand and tenants’ capacity to pay, rather than an individual investor’s mortgage or tax bill.
The bigger issue is how the reforms will change investor behaviour, the supply of established rental properties and the type of new accommodation available to tenants.
What is actually changing?
From 1 July 2027, investors who acquire established residential property after the Budget announcement will no longer be able to deduct rental losses against income such as wages and salaries.
Those losses will be quarantined and carried forward, allowing them to be used against future residential rental income or residential property capital gains.
Investors who purchase qualifying new homes that genuinely increase housing supply will retain negative gearing and receive more favourable capital gains tax treatment.
Properties held before the announcement are grandfathered, substantially reducing the likelihood of a sudden wave of forced investor sales.
However, grandfathering also creates a lock-in effect. An investor who sells an existing property cannot transfer its favourable tax treatment to another established investment, giving many landlords an incentive to hold rather than sell.
The cash-flow impact will change investor behaviour
Commonwealth Bank estimates that losing the immediate negative gearing deduction is equivalent to an increase of roughly 90 to 155 basis points in an investor’s mortgage rate from a cash-flow perspective.
Investors may eventually recover some of the lost benefit through carried-forward deductions, but that doesn’t help them meet today’s mortgage repayments, maintenance, insurance, land tax and other expenses.
An established property that was marginally viable under the previous rules could become unattractive, especially when rental yields are low and borrowing costs remain elevated.
Some investors will accept a lower return, while others will reduce the price they are prepared to pay, buy new property instead or invest elsewhere.
Across the market, this is likely to mean weaker investor demand for established rental properties than would otherwise have occurred.
Landlords can’t simply pass on every additional cost
A landlord can only charge what tenants are willing and able to pay relative to competing properties.
If an investor’s expenses rise by $200 a week, it doesn’t follow that the rent can also rise by $200. The tenant is unlikely to care whether the landlord has a large, small, or no mortgage.
However, higher costs influence whether investors enter or remain in the rental market.
When fewer people are prepared to supply rental accommodation at existing rents, vacancy rates can tighten and market rents can rise. This is how higher investor costs eventually reach tenants, rather than through a simple dollar-for-dollar pass-through.
The process takes time, which is why the effects are more likely to appear gradually over several years.
Won’t a first-home buyer replace a renter?
Supporters of the reforms reasonably argue that if an investor sells to a first-home buyer, one property leaves the rental pool while one tenant leaves the rental market.
There is some truth in this, and it helps explain why credible economic modelling generally predicts a smaller rental impact than some property industry forecasts.
However, the transfer is rarely that neat. The property may be bought by an existing owner-occupier upgrading or downsizing.
A home occupied by several unrelated tenants may also be purchased by a single household, meaning rental demand does not fall by the same number of people.
There is also a mismatch between the renters who can become homeowners and those most exposed to declining rental availability.
Higher-income tenants with savings, stable employment and borrowing capacity may benefit from reduced investor competition. Lower-income households, single parents, younger renters and older Australians without sufficient deposits will remain tenants.
Commonwealth Bank expects the reforms to leave dwelling prices just under 3% lower than they would otherwise have been. That will help some buyers, but it won’t turn most financially constrained renters into homeowners.
For these households, a smaller affordable rental pool may matter much more than a modest reduction in property prices.
Research from MCG Quantity Surveyors and SuburbTrends examined approximately 180,000 rental listings and found that newly built homes attracted an average national rental premium of around $65 a week compared with established properties.
In parts of Sydney, the difference was substantially higher. The research estimated an annual new-build premium of $24,700 in the northern eastern suburbs, $22,620 in the southern eastern suburbs and $20,800 in North Sydney and Mosman.
These figures don’t mean existing tenants will automatically receive rent increases of that size because of the tax reforms. They measure the current difference between rents for new and established accommodation.
- Also read:Latest Property Price Forecasts. Australian Property Market Outlook 2026-2027: Navigating a Market Correction
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- Also read:Melbourne property market forecast for 2026 & 2027 | Separating the fundamentals from the sentiment
- Also read:Sydney property market forecast for 2026 and 2027 | Why the short-term softness is a long-term opportunity
- Also read:Adelaide housing market update | September 2026
Yet the findings highlight another potential consequence of the policy.
If investors are directed away from lower-priced established dwellings and towards more expensive new properties, the composition of available rental housing will gradually change.
Australia may gain additional rental dwellings through construction while losing some cheaper options as established rental homes move into owner-occupation.
This could lift the entry price for tenants searching for accommodation, particularly in locations where new construction is expensive and affordable established rentals are already scarce.
Can additional construction fill the gap?
The government’s policy is based on the reasonable idea that tax concessions should encourage investors to fund additional housing rather than compete with homebuyers for properties that already exist.
Its success therefore depends heavily on the construction sector’s ability to respond.
Australia is already struggling to build enough homes because of elevated building costs, labour shortages, builder insolvencies, financing constraints and slow planning systems.
New apartment projects can take years to progress from land acquisition and approval to completion. Developers also require sufficient pre-sales before lenders will provide construction finance.
Even if investors respond as the government hopes, additional rental supply will arrive with a considerable lag. Weaker demand for established investments could occur much sooner.
There is also no guarantee that new homes will be built in the locations or price brackets where affordable rental accommodation is most urgently needed.
Developers build where projects are financially viable, while tenants need homes close to employment, transport, schools and family networks.
Treasury’s $2 estimate requires context
Treasury estimates that the reforms will increase the rent paid by a household at the current median by less than $2 a week.
Commonwealth Bank has reached a broadly similar conclusion, expecting a small and gradual effect because additional new construction may offset weaker investment in established properties.
The $2 figure is a modelled difference between rents under the reforms and rents under a scenario where the policy remained unchanged. It is not a forecast that total rents will rise by only $2.
In fact, rents have been rising significantly lately, and we're likely to see rents increasing by 20-30% over the next couple of years.
This will occur because of population growth, changing household formation, low vacancy rates and inadequate construction, with the tax reforms adding a smaller amount to that rise.
The rental market has little room for error
Australia’s rental market was tight well before these reforms were announced.
SQM Research reported that the national vacancy rate remained at 1.3% in July 2026, with Brisbane at 0.9%, Perth and Adelaide at 0.6%, and Darwin at just 0.3%.
National advertised rents were 7.2% higher than a year earlier, while the average advertised rent had reached approximately $698 a week.
Sydney and Melbourne had slightly more availability, with vacancy rates of 1.7%, although competition remains intense in many suburbs and affordable price brackets.
It would be misleading to attribute rent increases since the May Budget entirely to reforms that do not take full effect until July 2027.
The rental market was already undersupplied, while interest rates, population growth, construction delays and higher ownership costs were already pushing rents higher.
Nevertheless, investors make decisions based on future returns. Anyone considering an established investment today must account for the rules that will apply from July 2027, so the behavioural response has already begun.
The bottom line
There is a legitimate case for giving first-home buyers more opportunity to compete for established homes.
There is also a legitimate concern that the transition will make renting more expensive for households that cannot become homeowners.
The most defensible argument is that the reforms increase the cost of supplying established rental accommodation, favour more expensive new rental stock and depend on a construction industry that is already struggling to deliver enough homes.
Some renters will become homeowners and benefit from reduced investor competition. Many others will remain tenants and could face greater competition for affordable established properties.
With Australia’s vacancy rate sitting at only 1.3%, policymakers have very little margin for error.
Tax reform may change who owns our existing homes, but sustained construction remains the only way to overcome the underlying rental shortage.
