The Federal Budget has certainly shaken the property conversation this week, particularly around the proposed changes to negative gearing and capital gains tax. Unsurprisingly, social media and the clickbait brigade immediately went into overdrive, with some proclaiming the end of property investment as we know it and others celebrating what they believe will finally restore housing affordability for younger Australians.
As ever, the truth probably sits somewhere in the middle.
What the Government appears to be trying to do is fairly obvious. Reduce investor demand for established housing and redirect investor money toward the construction of new housing supply instead. On paper, sensible enough. Less competition against first home buyers, more apartments and homes being built, everybody wins.
Only property markets rarely behave as neatly as Treasury spreadsheets.
The first thing many seem to forget is that Australia’s housing issues are not simply demand driven. If they were, we’d have solved this years ago. The real issues sit deeper; planning delays, infrastructure bottlenecks, labour shortages, rising construction costs, slow approvals, builder collapses and finance constraints. Add to that record migration levels, years of underbuilding and a rental market already tighter than a drum and things become a little more complicated.
And this is where the Budget starts tying itself into knots.
At the same time the Government is attempting to reduce some of the tax attractiveness of property investment, it is also dramatically increasing infrastructure and housing related spending in an attempt to unlock more supply. Roads, utilities, transport corridors, housing funds, enabling infrastructure and planning support all sound wonderfully positive, and in many cases, they are absolutely necessary.
But here’s the catch.
That spending also injects more money into an economy already struggling with inflationary pressures, labour shortages and construction constraints. In simple terms, governments are now trying to lower housing costs whilst spending heavily into sectors already operating near capacity.
Jeez.
More government spending often means more inflationary pressure. More inflationary pressure means the Reserve Bank keeps interest rates higher for longer. Higher interest rates reduce borrowing capacity, increase holding costs and place more pressure on both developers and investors.
So, whilst the intention is to improve affordability, there is a real possibility we simply create another housing catch-22.
Let’s be realistic, the Government clearly understands it still needs private investors to fund housing supply. If it didn’t, it would not have exempted new residential property from the proposed negative gearing restrictions. Nor would it have retained optional CGT treatment for investors purchasing eligible new housing.
That part is important.
Despite the political messaging, this Budget is not really an attack on property itself. It is an attempt to redirect investor behaviour.
Established investment properties acquired after the commencement date would lose the ability to offset losses against ordinary income, with those losses instead carried forward against future property income or capital gains. Existing properties held prior to the changes remain grandfathered until disposal.
In simple English, existing investors aren’t suddenly being thrown off a cliff.
As for capital gains tax, the current 50% discount appears set to be replaced from July 2027 with a cost-base indexation model and a minimum 30% tax rate on future gains. However, gains accrued prior to the commencement date would still retain the existing treatment.
Again, the Government appears to be trying to avoid creating outright panic.
Here’s where things get interesting.
If fewer investors purchase established properties moving forward, fewer rental properties enter or remain within the rental pool. Whilst owner occupiers purchasing homes is undoubtedly positive for home ownership rates, owner occupiers do not provide rental accommodation.
That matters.
Especially when vacancy rates are already critically low in many parts of Australia.
So, whilst politically it may sound attractive to target investors, there is a very real risk that reduced investor participation tightens rental supply further and pushes rents upward. Not necessarily because landlords simply “pass on” tax changes, but because reduced rental supply naturally increases competition amongst tenants.
Markets are cycles within cycles.
The irony here is that the Government simultaneously appears to accept these changes may reduce future housing supply by tens of thousands of homes over time. Why? Because apartment developments in Australia are heavily reliant on investor pre-sales to secure bank funding.
No investors… no pre-sales.
No pre-sales… many projects simply don’t proceed.
That is the reality of development finance whether politicians like it or not.
And this is where I think the market may structurally shift.
Established property and new property are no longer playing on equal footing from a taxation perspective.
Established property still offers many positives; proven locations, established communities, larger land components in some cases and immediate scarcity. But moving forward they potentially become less tax efficient for new investors.
New residential property on the other hand retains significant advantages:
stronger depreciation benefits
retained negative gearing treatment
potentially more favourable CGT treatment
lower maintenance in the earlier years
and increasingly, policy support from Government itself.
Now before everyone rushes out buying the nearest shiny off-the-plan apartment tower, let us pause for a moment and inject some common sense.
Poor quality stock in poor locations is still poor-quality stock.
A badly designed apartment squeezed into an oversupplied corridor with limited employment, poor infrastructure and weak tenant demand does not suddenly become a good investment because Treasury changed a tax rule.
God no.
As I keep on harking on about… Good investment property has always relied on the same fundamentals:
strong tenant demand
good access to employment
infrastructure
transport
lifestyle amenity
sensible supply levels
and importantly, the ability to hold through market cycles.
And that hasn’t changed.. what probably has changed is investor behaviour.
The old strategy of buying almost anything, negatively gearing heavily and relying on endless capital growth may become less attractive moving forward. Investors will likely become more selective, more yield conscious and more focussed on long-term holdability rather than speculation alone.
Frankly, that may not entirely be a bad thing
Of course, politically this all makes plenty of sense.
Younger Australians are frustrated, and rightly so. Many feel completely locked out of housing ownership, watching prices rise faster than wages whilst carrying university debt, paying record rents and trying to save deposits in an inflationary environment. For many, the idea of home ownership now feels more like a Netflix fantasy than the Australian dream many of us grew up with or bought into on arrival here.
So naturally, policies targeting investors sound attractive on paper and governments know this.
Tell younger voters you are “taking on investors” and “improving affordability” and it cuts through immediately, particularly amongst those who feel the ladder has already been pulled up behind them.
But here’s the uncomfortable bit.
If these policies reduce rental supply, keep construction constrained and contribute to inflationary pressure through increased government spending, then there is every chance that rents continue rising. And if rents continue rising, how exactly does the next generation save for a deposit?
That’s the part I struggle with.
As an old hack who has watched more than a few cycles come and go, I can’t help but feel we are again trying to treat the symptom rather than the disease. Housing affordability in Australia is not simply an investor problem. It is a supply problem, a planning problem, an infrastructure problem and increasingly, a productivity problem.
You can make property investment less attractive politically, but unless you materially increase quality housing supply in the right locations, younger Australians may still find themselves exactly where they are today… just paying even more rent whilst trying to save a deposit and for many the university debt they’ve accumulated following their Australian dream.
Rather defeats the point, doesn’t it?!
As an example, let us take an investor who purchased a brand-new off-the-plan apartment eight years ago for $700,000. Over that period, they have benefited from depreciation allowances, interest deductions and traditional negative gearing treatment. Let us assume that property today is worth approximately $1.1 million.
Under the current system, if that investor sold today, the gross capital gain would be around $400,000 before costs. Assuming the asset qualified for the existing 50% CGT discount, only half of that gain would be added to their taxable income.
Now compare that to somebody purchasing an established investment property after the proposed changes commence.
Not only would future rental losses no longer offset ordinary income in the same way, but future capital gains may also be taxed under a very different framework. Suddenly the after-tax return equation changes considerably.
That’s the real shift here.
Existing investors are not suddenly being thrown off a cliff, but future investors will likely become far more conscious of after-tax outcomes, holding costs and asset selection moving forward.
And importantly, this is exactly why new residential property may become increasingly attractive relative to established property under the proposed framework, particularly where depreciation benefits, tenant demand and long-term supply constraints still stack up.
The broader concern for me is confidence.
If investors begin to feel property is becoming politically targeted every election cycle, capital eventually starts flowing elsewhere. When confidence slows, apartment pipelines dry up surprisingly quickly, particularly whilst construction costs remain elevated, and finance remains tight.
Meanwhile migration continues, population grows, infrastructure lags and rental demand intensifies.
Cycles within cycles.
Australia still fundamentally needs private investors to help fund housing delivery. Governments can assist with infrastructure and policy, but they are unlikely to build enough housing on their own to satisfy future demand.
So, whilst this Budget may reshape investor behaviour, it probably does not fundamentally alter the long-term supply and demand imbalance underpinning Australian property.
If anything, it simply changes what type of property investors are likely to favour moving forward.
And as ever, good property in good locations will continue to outperform poor property in poor ones… regardless of who happens to be sitting in Canberra.