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    The Federal Budget has confirmed a major shift in housing tax policy, with negative gearing to be limited to new builds and CGT changes designed to reduce the tax advantage of investing in property. The intent is clear: reduce investor competition for existing homes and redirect capital into new housing. But while this may be politically neat, the housing market is more complicated. Australia’s affordability problem is not simply the result of investors buying established homes. It is the result of not enough homes being built in the places people need to live. These changes do not remove housing pressure - they risk shifting it from purchase prices into rents.

    The changes are significant. Negative gearing will be limited to new builds from 1 July 2027. Established properties acquired before 7:30pm (AEST) on 12 May 2026 will be grandfathered until sold, while established properties acquired after that time will be subject to the new rules from 1 July 2027.

    The 50 per cent capital gains tax discount will also be replaced from 1 July 2027 with cost-base indexation for assets held for more than 12 months, alongside a 30 per cent minimum tax on net capital gains. This means investors will generally be taxed on inflation-adjusted gains rather than receiving a flat 50 per cent discount, although gains accrued before 1 July 2027 will retain the existing discount and investors in new residential properties will be able to choose either the 50 per cent discount or the new indexation/minimum-tax treatment.

    Together, the changes are designed to reduce the tax advantage of buying established investment properties and push more investor demand toward new supply.

    1. Price pressure shifts to rental pressure

    The risk with these changes is that they do not remove housing pressure; they change where it shows up. If investor demand for established homes falls, some buyers may face less competition. But grandfathering means many existing investors are likely to hold rather than sell, limiting the number of established homes coming to market and muting the buyer benefit. Where rental homes do move into owner-occupation, the rental pool shrinks. The pressure does not disappear - it shifts from house prices into rents.

    Victoria gives us a clear warning. A series of policy changes increased the cost and complexity of holding investment property, including the COVID Debt Levy through higher land tax, a lower land tax threshold, higher absentee owner surcharges, broader vacant residential land tax and tighter rental regulation. These changes were designed to raise revenue and improve renter protections, but they also made investment property much less attractive for landlords

    As a result, active residential bonds fell from around 676,000 in mid-2023 to 655,000 by mid-2024 - a loss of more than 20,000 rental properties in a year, as outlined in Figure 1. The result was not greater affordability overall, but a redistribution of it: buyers benefited from weaker price growth, while renters faced tighter supply and stronger rent increases. In Melbourne, house price growth has been relatively subdued, while rents have risen by around 35 per cent over five years. That is not a solution to affordability - it shifts the cost onto renters, who are typically younger, lower-income and less able to absorb it.

    Figure 1 (below). Reductions in investor participation tighten rental supply

    Changes in policy settings that reduce investor participation can lead to a measurable contraction in rental supply, as reflected in declining rental bond data.

    While such policies may moderate price growth for buyers, they often do so by increasing pressure in the rental market - shifting affordability challenges onto renters, who are disproportionately younger and lower income households.

    Figure 2 (below). Softer price growth does not mean affordability has improved

    Melbourne shows how housing pressure can shift rather than disappear. Over the past five years, house prices have increased by just 11 per cent, while rents have risen by 35 per cent.

    This matters because policies that reduce investor participation may moderate price growth for buyers, but they can also tighten rental supply and push more pressure onto renters. Affordability is not improved if lower price growth is achieved at the cost of stronger rent increases.

    2. Rental supply becomes geographically distorted

    Limiting negative gearing to new builds assumes rental supply is interchangeable. It is not. Investor activity would be pushed toward the parts of the market where new housing can be delivered most easily: outer growth corridors, apartment precincts and masterplanned communities. These are important sources of supply, but they are not always where renters need or want to live. A new apartment in a growth corridor does not replace an established rental home near a school, hospital, university, transport hub or major employment centre.

    The risk is that the policy creates more rental stock in some locations while reducing it in others. Established suburbs, middle-ring locations and areas with limited new development become less attractive for investors, even though they are often the places with the strongest rental demand. This narrows renter choice and makes the rental market less flexible. Housing affordability is not just about the total number of dwellings; it is also about whether homes are available in the right locations, at the right price points and in the right dwelling types.

    3. Regional markets are left exposed

    Regional rental markets are particularly vulnerable to this kind of change because many do not have deep new development pipelines. In many regional areas, new housing is expensive to build, land may be available but serviced land is not, trades are limited, and completed values often do not justify construction costs. If investors are discouraged from buying established rental homes, there may not be enough new supply coming through to replace that stock.

    This matters because regional rental markets are often very sensitive to small changes in supply. A handful of investors selling or choosing not to buy can have a meaningful impact on availability, particularly in areas with hospitals, universities, tourism, agriculture, mining or major infrastructure projects. Limiting negative gearing to new builds may work better in markets where new housing is being delivered at scale. In regional areas where development is limited, it risks reducing rental availability without creating a realistic replacement source of supply.

    4. Rentvesting becomes harder for young buyers

    Limiting negative gearing to new builds also weakens one of the few pathways younger buyers still use to enter the market. Many cannot afford to buy where they want or need to live, particularly close to work, family, transport or lifestyle amenities. Rent-vesting allows them to keep renting in those locations while buying a more affordable investment property elsewhere. It is not perfect, but it has become a practical way for younger Australians to start building equity in a market where ownership is increasingly out of reach.

    This is where the policy risks worsening intergenerational inequity. Older Australians have been able to build wealth through established property over decades, with the support of the existing tax system. Restricting negative gearing to new builds means younger buyers are increasingly locked out of the same pathway. They are being asked to enter the market later, with higher prices, larger deposits and fewer investment options. A policy designed to improve fairness could end up narrowing one of the few remaining ways younger Australians can build housing wealth.


    5. Transaction volumes are likely to fall

    One of the more immediate risks is lower transaction activity. If investors are discouraged from buying established properties, a major buyer group is removed from part of the market. At the same time, grandfathered investors are likely to hold for longer because selling means giving up their existing tax treatment. That creates a thinner market: fewer investors buying, fewer investors selling, and more households waiting to see how the rules settle before making decisions.

    This matters because housing turnover supports a much broader part of the economy than the sale itself. Fewer transactions flow through to agents, conveyancers, mortgage brokers, lenders, trades, removalists and retail spending. Even if prices do not move dramatically, lower turnover has real economic consequences. It reduces market liquidity, makes price discovery harder, and slows activity across the many businesses that rely on housing transactions.


    6. The changes do not guarantee new supply

    Limiting negative gearing to new homes creates a tax preference for new housing, but that is not the same as guaranteeing more homes will be built. For the policy to increase supply, investors need to buy new properties at prices that make projects viable. That depends on planning approvals, infrastructure, construction costs, labour availability, finance and whether the finished product is in a location where people actually want to rent. If those constraints remain, the tax setting alone will not deliver the supply response the government is hoping for. Construction costs in particular remain extremely high and have re-accelerated.

    Figure 3 (below). Construction costs have re-accelerated

    Housing construction cost growth has eased from the extreme levels recorded in 2022, but are now rising again

    Redirecting investor demand toward new builds may support some projects, but it does not remove the constraints affecting supply. If construction remains expensive, labour is limited and projects are difficult to make viable, a new-build tax preference will not automatically translate into more affordable rental housing.

    There is also a resale issue. A property is only “new” once. Once it is sold again, the next investor buyer may not receive the same tax treatment, which narrows the future buyer pool. That affects what an investor is willing to pay today. Some investor demand will shift into new housing, but this does not automatically translate into more construction, particularly if investors are worried about resale value or if projects still do not stack up.


    7. CGT revenue will be market sensitive

    Replacing the 50 per cent CGT discount with cost-base indexation may look like a straightforward budget repair measure, but the outcome will depend on the market.

    If property prices rise strongly, the change is likely to raise more revenue. But if price growth is weak and inflation remains relatively high, indexation will reduce the taxable gain because the cost base is adjusted for inflation.

    The new 30 per cent minimum tax on net capital gains means this is not a simple return to taxing only real gains. But the broader point remains: the Budget assumes a material revenue benefit, and that benefit will depend on inflation, house price growth and how investors respond.

    8. Labour mobility becomes harder

    Rental housing plays an important role in labour mobility. People rent when they move for a new job, take up a temporary contract, study, separate, migrate, or relocate before deciding whether to buy. If established rental supply tightens and new investor-owned stock is concentrated in particular locations, it becomes harder for workers to move to where jobs are available.

    This matters beyond housing. Employers already face staffing challenges in many high-demand areas, including healthcare, education, construction, tourism and regional services. If rental options become harder to find in established employment centres, housing policy becomes a labour market problem. A policy aimed at improving affordability could end up reducing workforce flexibility.

    9. The rental market is not a static pool

    The argument for reducing investor demand often assumes a simple transfer: a renter buys a former rental property, becomes a first home buyer, and the problem is solved. But the rental market does not work that way. Renters are constantly entering and leaving the market as young people move out of home, migrants arrive, relationships change, students relocate, and workers move between cities and regions.

    If a rental home becomes owner-occupied, that may help one household buy. But it also removes a dwelling from the rental pool, while new renters continue to arrive. This is why reducing investor participation does not necessarily improve affordability overall. It may change who occupies a particular home, but unless total housing supply increases, the pressure remains in the system - and often reappears as higher rents and fewer rental options.

    There are positives in the budget, but they are mostly supply-side measures that work slowly rather than policies that will immediately change housing affordability.

    The strongest is the commitment of $2 billion for enabling infrastructure - local roads, pipes, water, power and sewerage - to help unlock up to 65,000 homes over a decade. This recognises one of the biggest constraints on housing supply: homes cannot be built if the land is not serviced. In that sense, this is a better-targeted housing measure than demand-side assistance because it goes to the physical barriers that stop projects from proceeding.

    There is also a positive focus on the construction workforce. The government’s housing construction apprenticeship stream is providing $10,000 incentive payments to eligible apprentices, with support also available for employers. More than 11,000 housing construction apprentices had commenced under the program in its first six months, including in trades such as carpentry, electrical and other critical construction occupations. That matters because the national housing target cannot be achieved without more people on the tools.

    Measures to improve recognition of migrant skills and speed up project approvals will also help, particularly if they reduce delays for residential construction trades and housing projects. Labour shortages, slow approvals and infrastructure gaps are all part of the same problem: Australia is not just short of housing demand; it is short of housing delivery capacity.

    But the scale needs to be kept in perspective. Unlocking up to 65,000 homes over ten years is useful, but Australia’s national target is 1.2 million new homes over five years. Apprenticeship incentives are welcome, but new apprentices take years to become fully productive tradespeople. Faster approvals help, but only if projects are financially viable and supported by infrastructure, labour and finance.

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