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The mechanism is actually very straightforward.
Take a suburb like Newtown. It is an established suburb with extremely strong housing demand but relatively limited capacity for large amounts of new development.
Under the proposed tax settings, investor demand for established properties falls because those properties become less attractive relative to new builds. Existing investors are grandfathered, so the change happens gradually rather than immediately. But over time, as those properties are sold, more are likely to be purchased by owner-occupiers rather than investors.
At that point, the property leaves the rental pool.
This is the part people keep skipping over.
A home that becomes owner-occupied is no longer available for rent. Over time, that means fewer rental properties in suburbs where people still very much want to live.
And demand to rent in places like Newtown does not disappear simply because investor tax settings change.
People still want to live near work, schools, transport, hospitals, universities, family and social networks. Young workers moving to the city still rent. Students still rent. Recently separated people still rent. Migrants still rent. People saving for deposits still rent. Older people who no longer want the responsibility of ownership still rent. Some people will never buy. Some simply do not want to.
The rental market is not a static pool where one renter neatly transforms into one owner-occupier. That assumption is fundamentally wrong.
The person buying the former rental property may be a higher-income household, someone with parental assistance, a dual-income couple trading up, or an existing owner selling another property. Meanwhile, the renter living in that home may not be financially capable of purchasing at all.
So when that rental property disappears, the renter does not magically disappear with it. They still need somewhere to live.
Now imagine this happening repeatedly across an established suburb over many years.
The number of rental listings gradually falls. But rental demand remains strong.
Eventually a rental property becomes available for lease. At the previous rent, demand would likely be overwhelming because there are now fewer rental options available overall. Agents may receive dozens of applications.
Who gets chosen?
The family with children already enrolled in the local school? The elderly person wanting to stay near family support? The worker who needs to live close to the hospital where they work? The person with a dog trying to stay near their community? The recently divorced parent trying to remain near their children?
In practice, the market resolves this scarcity through price.
The rent rises until enough prospective tenants are priced out that demand roughly matches supply.
Again, this is not primarily about “greedy landlords”. It is about scarcity.
And importantly, policymakers themselves clearly understand this risk. That is precisely why the policy had to be grandfathered.
Without grandfathering, there would likely have been a much sharper adjustment. Investors facing materially worse tax treatment may have sold large numbers of established rental properties relatively quickly. Many of those homes would have transferred into owner-occupation. That would not simply have reduced prices. It would also have removed rental stock at speed.
The result could have been a significant rental shock: renters displaced from former rental properties while simultaneously competing for a shrinking number of remaining rentals.
Grandfathering slows that process. It does not eliminate the mechanism.
And this is where much of the public debate becomes frustratingly simplistic. The discussion often treats “housing demand” as though buyers and renters are interchangeable groups operating in a single market. They are not.
The ownership market and the rental market overlap, but they do not contain the same households at the same time, with the same financial capacity, life stage or housing preferences.
Reducing investor participation in established housing may well moderate price growth. We have already seen evidence of this in Victoria. But if it simultaneously reduces rental supply in high-demand locations, rents rise because the remaining rental stock becomes more scarce.
That is not a moral statement. It is the mechanism.
