The most likely outcome: Negative Gearing & Capital gains tax changes in 2026
The Albanese government is preparing to reform negative gearing and capital gains tax. But the forces that actually move house prices are barely part of the conversation.
Jim Chalmers has a housing problem, and he has decided that tax is the solution.
In the weeks leading up to the May 12 federal budget, the Treasurer confirmed that Treasury is modelling changes to two of the most politically charged settings in Australian property: negative gearing, which allows landlords to deduct rental losses against their wage income, and the capital gains tax discount, which halves the tax bill on assets held longer than twelve months. Both have been in place, largely untouched, since 1999.
The debate that followed has been loud, technically detailed, and in important ways, beside the point.
Before you make an offer
If you’re buying a home, making that decision without an independent, objective view is a risk many buyers underestimate. Before you make an offer, order a PropCred Pre-Purchase Report (for only $39) to get an independent analysis of the property you are buying. Our analysts with extensive industry experience provide professional insight specific to your property purchase.
The professional report prepared by our analyst team includes price guidance, rental returns, growth potential, and clear buy-or-don’t-buy recommendations, with the reasoning laid out behind the numbers. Reports are typically delivered within one hour.Order your PropCred Pre-Purchase Report – $39 →
What the Government Is Actually Considering
The proposals being discussed range from modest to structural. On capital gains tax, the government is looking at reducing the existing 50 percent discount to somewhere between 25 and 33 percent, or abolishing it entirely for residential investment property. On negative gearing, the options include capping deductions to one or two investment properties, restricting losses so they can only offset other investment income rather than salary, or limiting access to newly constructed dwellings only.
None of these changes have been legislated. No final decisions have been announced. But the public modelling exercise serves a purpose: it tells investors, voters, and the Senate crossbench that this time, unlike before the 2025 election, the government is serious.
The political logic is straightforward. Labor won a majority government. Independents and the Greens broadly support reform. Housing affordability has become one of the defining anxieties of younger Australians, and the annual revenue cost of the existing concessions, estimated at around $20 billion, sits uncomfortably in a budget under pressure. The window is open.
Whether walking through it actually solves the housing problem is a different question.
Four Scenarios, Four Sets of Winners and Losers
The proposals under discussion effectively produce four distinct outcomes depending on how far the government is willing to go.
Scenario 1 – Cosmetic Reform
A modest CGT trim with no change to negative gearing
The most cautious version would leave the existing system almost intact. Existing investors would be untouched, new investors would face only marginally different economics, and first home buyers and renters would see no meaningful change in their competitive position.
The government would absorb the political cost of reopening a divisive debate without delivering anything substantive. It is the worst of both worlds and is widely seen as too timid to survive Senate scrutiny.
Impact Summary
| Category | Outcome |
| Existing investors | No change |
| New investors | Slightly worse, but largely unchanged |
| First home buyers | No improvement |
| Renters | No improvement |
| Government | Political cost without impact |
Scenario 2 – Moderate Reform with Grandfathering (Most Likely)
CGT reduced to ~33%, negative gearing capped, applies only to new purchases
This is the politically survivable version. The CGT discount would fall to around 33 percent, negative gearing would be capped at one or two properties, and both changes would apply only to new purchases from an announced start date.
Existing investors would retain their concessions indefinitely, while new builds would likely receive preferential treatment to redirect investor demand toward construction rather than established stock.
It avoids immediate market disruption and allows the government to claim action. However, it makes almost no difference to renters or aspiring buyers in the near term, as grandfathering delays meaningful impact for a decade or more.
Impact Summary
| Category | Outcome |
| Existing investors | Protected (grandfathered) |
| New investors | Reduced tax benefits |
| First home buyers | Gradual, modest improvement |
| Renters | No short-term relief |
| Developers | Beneficiaries via new-build incentives |
Scenario 3 – Structural Reform
Ring-fencing of rental losses + CGT reduction
A more structural reform would prevent landlords from using rental losses to offset salary income. This directly affects existing investors, not just future ones, and fundamentally changes the economics of property investment.
A high-income investor currently losing $30,000 annually might receive a tax benefit of over $13,000. Removing that benefit turns the investment into a fully exposed cash loss.
Some investors will sell. In a rental market with a vacancy rate around 1.1 percent, even a modest exit of landlords has material consequences.
Impact Summary
| Category | Outcome |
| Existing investors | Immediate financial impact |
| High-income earners | Lose key tax advantage |
| Property market | Potential increase in listings |
| Rental market | Supply risk drives upward pressure on rents |
| Government revenue | Significant increase |
Scenario 4 – Significant Reform (Pocock Model)
Full CGT removal (for new purchases), negative gearing limited to one property
The most aggressive version would remove the CGT discount entirely for new residential investment properties, restrict negative gearing to a single property, and disallow deductions on vacant dwellings.
This would represent the most significant overhaul of Australia’s property tax system since the 1999 reforms under John Howard.
It would meaningfully shift the balance between investors and owner-occupiers, reducing investor dominance in the housing market. However, it carries the highest transition risk, particularly in a rental market with extremely low vacancy.
Impact Summary
| Category | Outcome |
| Multi-property investors | Structurally disadvantaged |
| First home buyers | Strongest relative benefit |
| Rental market | High short-term risk |
| Property prices | Downward pressure (especially investor-heavy segments) |
| Long-term system | Fundamental reset of investment incentives |
About to make an offer?
Get an independent PropCred Pre-Purchase Report with price guidance, rental returns and a clear buy-or-don’t-buy recommendation.
Delivered within one hour.Order now for $39 →
Quick Comparison View
| Scenario | Policy Depth | Market Disruption | Impact Timing | Political Risk |
| Scenario 1 | Minimal | None | None | High (no impact) |
| Scenario 2 | Moderate | Low | Very slow | Low |
| Scenario 3 | Structural | Medium | Immediate | Medium |
| Scenario 4 | Aggressive | High | Immediate + long-term | High |
The Variable the Debate Is Ignoring
Every scenario assessment in the public debate treats tax policy as the primary driver of property prices. It is not, and the gap between that assumption and reality is where the analysis breaks down.
The Reserve Bank of Australia is broadly expected to continue easing monetary policy through 2026 and into 2027. Each 100 basis point reduction in the cash rate increases the borrowing capacity of a median household by roughly 10 to 15 percent. That is not a marginal effect. A family that could borrow $700,000 at current rates can borrow $770,000 to $805,000 after a 1 percent rate cut. That additional capacity flows directly into prices through competitive bidding.
The CGT discount reduction from 50 to 33 percent, by contrast, produces a price effect that credible modelling places at around 2 to 3 percent in the most exposed segments. The rate cycle effect is five to seven times larger. If rates fall meaningfully through 2026 and 2027, property prices will likely rise in aggregate even if tax reform lands. Reform will show up not as a price decline but as a compositional shift: investors are a smaller share of transactions, owner-occupiers a larger one. Headline prices tell a story of resilience. The underlying dynamics change more quietly.
There is one scenario where tax reform dominates. If rates stay flat or rise unexpectedly and aggressive reform lands simultaneously, forced sellers from ring-fencing or CGT removal face a thin buyer pool with no borrowing capacity uplift to offset their exit. That combination produces genuine price correction in the most exposed segments. It is also the combination the government would be most careful to avoid, which is part of why the timing of reform and the trajectory of the rate cycle are inseparable questions.
Migration and the Demand Floor
The second variable missing from most scenario modelling is population growth.
Australia’s net overseas migration reached approximately 500,000 in 2022 and 2023, and has remained at historically elevated levels. The government’s own housing accord targets, built around demographic projections, have already been exceeded by actual arrivals. Each new permanent or long-term resident needs somewhere to live. Most rent first and buy later, if at all. In a market already running at 1.1 percent vacancy nationally, that demand does not wait for supply to catch up.
This creates a demand floor that operates independently of tax settings. Even in a scenario where investors exit in meaningful numbers and sell established rental stock, incoming migrants partially fill the buyer gap and fully fill the rental demand gap. Inner Melbourne and inner Sydney, which are simultaneously the markets most exposed to investor exit and the markets absorbing the largest share of new arrivals, face an unusual combination: downward price pressure from tax reform intersecting with upward rental pressure from population growth. The result is unlikely to be the clean price correction that reform advocates predict.
The geographic concentration of migration makes this effect more acute, not less. The cities where rental stress is already most severe are the cities where incoming demand is strongest. Rental relief from investor exit will be slower to materialise than reform models assume, because the queue of incoming tenants is long.
The Supply Problem Nobody Is Solving
The argument for redirecting investor demand toward new construction rests on an assumption that construction can respond. The evidence that this is true is limited.
Australia’s construction sector has experienced elevated insolvency rates through 2023 and 2025, as fixed-price contracts written before the inflation surge became unviable. The firms that failed took project pipelines, workforce relationships, and site management capacity with them. Build costs have risen 30 to 40 percent since 2020. Skilled tradespeople, electricians, plumbers, and concreters, are in short supply across every capital city, and that shortage does not resolve quickly regardless of how much investor demand is directed at new dwellings.
The planning system compounds the problem. From investor demand signal to completed dwelling in a major urban market typically takes three to seven years, accounting for approval processes, infrastructure contributions, heritage assessments, and construction timelines. Tax reform takes effect on a budget date. Supply response operates on a generational timeline.
The National Housing Supply and Affordability Council confirmed in its 2025 report that Australia completed approximately 177,000 new dwellings in 2024 against estimated underlying demand of 223,000. The housing accord target of 1.2 million new homes over five years requires approximately 240,000 completions per year. Actual commencements in 2025 were running around 196,000 annually, roughly 18 percent below the required pace, before any impact from reform.
Redirecting investor capital toward new builds will not close that gap if the labour, planning capacity, and financial feasibility to build more simply does not exist. In the most likely outcome, directing additional investor demand at a supply-constrained sector raises the price of new builds rather than increasing their quantity. That is helpful for developers and existing landholders. It is not materially helpful for housing affordability.
What Markets Will Actually Do
Understanding which property segments face pressure and which find support requires holding all three variables simultaneously: tax settings, the rate cycle, and migration-driven demand.
New residential construction is the relative beneficiary of almost every reform scenario, but with the important caveat that benefit is captured in land and construction prices, not necessarily in the number of new homes built. High-yield regional markets, places offering gross yields of 6 to 8 percent, become more attractive to investors who can no longer rely on salary-offset tax refunds to make low-yield assets viable. Owner-occupier markets in middle-ring suburbs, where investors and first home buyers have competed most directly, see a gradual shift in competitive balance over years rather than months.
The markets facing genuine structural pressure are low-yield established investment properties in inner-city precincts. An apartment in Southbank or Pyrmont yielding 2.5 percent was only financially viable for most investors because of the tax refund generated by its annual losses. Remove the refund and the asset bleeds cash without compensation. These properties face the longest adjustment as investors rationalise portfolios toward assets that work under the new settings.
The outer suburban investor belts in Brisbane, Perth, and Melbourne’s western corridors, where interstate investor demand has driven strong price growth, are exposed in a different way. They carry higher investor ownership rates than inner-city markets, meaning the depth of owner-occupier demand to absorb any investor retreat is shallower. If investor enthusiasm cools, price support in these areas thins more quickly than in markets with stronger occupier demand.
Most Likely Outcome
Independent. Data-driven. Delivered within one hour.
For just $39, our analyst team prepares a professional pre-purchase property analysis tailored to your property. We break down fair value, rental potential, long-term growth drivers and risk factors, with a clear recommendation and the reasoning behind it.
Before you commit hundreds of thousands, get the numbers right.Get your PropCred report for $39 →
The most likely outcome in 2026 and 2027 is that moderate tax reform lands into a falling interest rate environment with sustained high migration and a construction sector that cannot meaningfully increase output.
In that combination, headline property prices hold or rise modestly. Investor composition shifts at the margin toward new builds. Established inner-city investment properties soften in relative terms. Rents stay elevated. First home buyers gain ground so slowly it is barely visible in the data.
Tax reform will be judged to have worked or failed based almost entirely on which story gets told about headline price numbers in the two years after the budget. The structural housing deficit, the gap between what gets built and what the population needs, will continue widening regardless.
That is not a reason not to reform the tax settings. The existing concessions are expensive, inequitable, and concentrated among high-income households in ways that are difficult to defend on policy grounds. Removing them makes the system fairer and eventually, over decades, shifts the economics of Australian housing in a better direction.
It is a reason to be precise about what reform can and cannot do. It can change who benefits from the tax system. It cannot, on its own, build the homes Australia needs. That requires a different conversation entirely, one about zoning, infrastructure, construction capacity, and planning reform, that is conspicuously absent from the debate currently consuming Canberra.
The budget lands on May 12. The hard part starts after that.
Leave a Reply