Australia's property market faces its most significant tax overhaul in decades after the 2026 federal budget moved to restructure the capital gains tax discount and remove negative gearing on established residential properties.
A new market analysis from REA Group's economics team finds that while the reforms are likely to be manageable for most of the market, the timing could not be worse for renters — and the country's underlying supply crisis remains largely unaddressed.
Both measures take effect from 1 July 2027 and share two defining features: existing holdings are grandfathered, and newly built homes are exempt from both changes. That design is deliberate — the government is trying to redirect investor activity toward new construction rather than simply reduce investor participation overall.
Under the revised capital gains tax arrangements, investors will be taxed on the real, above-inflation gain on an asset rather than receiving a blanket 50% discount on the nominal gain, with buyers of new properties able to choose between the existing discount or the new inflation-indexing model.
On negative gearing, property investors will no longer be able to offset net rental losses against their wage or salary income — though those losses can be carried forward and applied against future rental income or capital gains. New builds remain exempt from this change as well.
The REA analysis notes that roughly 27% of properties that generated a capital gain over the past decade would actually have paid less tax under the new indexation model — a nuance likely to be lost in the broader political debate.
REA's modelling points to a small near-term decline in home prices, particularly in areas with heavy investor activity — typically the more affordable end of the market. That outlook is playing out against an already strained borrowing environment — RBA lifted the cash rate to 4.35% in May, its third consecutive increase this year, with Cotality warning the May hike may not be the peak of the rate cycle.
Government projections suggest around 75,000 additional first-home buyers could enter the market over the next decade as investors gradually exit established housing. For renters, however, the picture is considerably less encouraging.
Australia's national rental vacancy rate stood at just 1.36% in April — still far short of what analysts consider a healthy market — and rental affordability has deteriorated to its worst position since at least 2008, according to realestate.com.au's own Rental Affordability Report. Against that backdrop, even a modest reduction in investor participation carries elevated risk.
"Policies that reduce investor participation, even modestly, carry a higher risk of tightening rental supply. The effect on the most affordable segments of the rental market deserves close attention," the REA Group economics team said.
The report also flags a distributional concern: because the new build exemption is likely to direct fresh investor activity toward outer suburban growth areas and inner-city apartment towers, rental supply in established middle-ring suburbs — where demand is strongest — could tighten further. REA warns this geographic mismatch means rents in some locations could rise by more than aggregate national estimates suggest.
The federal budget's $2 billion Local Infrastructure Fund is welcomed by REA as a step in the right direction, with the government estimating it will unlock around 65,000 homes. However, the report is frank about its limitations — the process is expected to take between five and 10 years, and the scale falls well short of what the affordability challenge demands.
"Tax incentives alone cannot solve the underlying feasibility challenges currently facing the construction sector; high and growing construction costs, labour shortages, and rising interest rates," the team said.
REA argues the federal government needs to go further in coordinating planning, zoning, and stamp duty reform with state and local governments. On Treasury's own numbers, the tax changes are projected to reduce the cumulative number of new homes built over the next decade by 35,000 — a net negative for supply that the infrastructure funding only partially offsets.
For brokers advising clients on long-term market conditions, that figure is the starkest signal in the report: the policy settings as designed will leave Australia with fewer homes than it would otherwise have built.
Get the hottest and freshest property and mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
