Housing forecast update
Tax changes announced in the Federal budget on May 12 are expected to significantly affect Australia’s housing markets.
The changes to capital gains tax and negative gearing remove the relative attractiveness of new investment in housing. ‘Grandfathering’ for existing investors limits near-term impacts while an exemption for new investments in newly built dwellings will make this a more attractive option for investors.
Combined with recent and expected interest rate increases, the changes are expected to see a 34% fall in new investor activity near-term with the mix skewing towards newly built dwellings. Total housing market turnover is in turn expected to decline 20%. Dwelling price growth is now expected to stall flat on average across the major capital cities for calendar 2026.
The main risk near-term is of a more significant ‘air pocket’ for markets with the potential for sharper price movements as the slowdown in turnover combines with uncertainty about tax changes and higher interest rates. This risk is mitigated somewhat by grandfathering provisions and positive price expectations
Over the medium to longer term, the changes are expected to see more muted price cycles, a small, gradual lift in rental yields, a modest lift in new dwelling construction and a gradual shift towards ‘landlordism’ – where the provision of market rental housing is increasingly by individuals and businesses for whom this is their primary source of income.
Generational change
As set out in our budget note, the main changes are:
Capital gains tax (CGT): from July 2027, the discount applied to future capital gains on investments will move from a flat 50% to cumulative inflation over the holding period. The taxable component will continue to be taxed at marginal rates but with a new minimum rate of 30% being applied.
Negative gearing: from budget night, net losses on new residential property investments will not be able to be deducted from other (non-property) income, such as wages. Net losses will still be able to be deducted from rental income, including from other rental properties, with any resulting losses also able to be carried forward to future tax years.
Minimum tax rate on trusts: from July 2028, there will also be a new 30% minimum tax rate applied to discretionary trusts and similar vehicles.
The reforms include some important exemptions:
Grandfathering: negative gearing will continue to be available for investments that were made prior to budget night. Capital gains on existing investments up to July 2027 will also continue to receive a 50% discount.
Newly built dwellings: new investments in newly built dwellings will still be able to be negatively geared and will have an option for capital gains to be discounted by either 50% or cumulative inflation.
In terms of new investment in existing dwellings, the changes unwind the 50% CGT discount that was introduced in 1999 while the changes to negative gearing remove a treatment that was introduced in 1936 (with limits briefly in place in 1985–87).
Behavioural impacts
The overarching goal is to shift the balance from house purchase as a pathway to wealth-creation back towards home ownership. As the budget notes, house price growth has been more than double the growth in average full-time earnings since 1999. Even allowing for a rising incidence of ‘dual-income’ households, the deterioration in affordability is have a clear detrimental effect on the rate of home ownership which, amongst 25–34 year olds, has declined from 50% to 43% over the last 20 years (reflecting both an outright decline in lifetime home ownership and delays in first home purchase, the average first home buyer now in their mid-30s).
Treasury states that the reforms “will help level the playing field for first home buyers, preserve the gains investors have made, and support investment in new housing supply.”
The primary effect is to reduce the relative attractiveness of new leveraged investment. The previous negative gearing treatment allowed the cost of these investments to be deducted at high marginal tax rates while the 50% CGT discount meant returns were taxed preferentially. Note that inflation indexation means CGT is still discounted – in some cases by more than under the previous regime. When capital gains are less than double the cumulative rise in inflation over the holding period, the indexation treatment is slightly more favourable than the 50% discount. Indeed, moderate or steady capital gains are taxed more or less the same. However, large ‘jackpot’ gains are treated very differently with the 50% discount a much bigger concession than inflation adjustment. The 50% discount also tends to favour long-held assets. However, it is the removal of negative gearing that is the more material change for most investors. Treasury estimates that about a third of negatively geared rental properties receive an outright tax subsidy over the life of the asset – i.e. total tax deductions are larger than tax paid.
The grandfathering of changes strongly encourages current holders of leveraged investments that are negatively geared to retain these assets in a negatively geared way for as long as possible. As such, current holders are likely to both retain these assets and seek to maximise tax benefits, e.g. by carrying higher levels of debt against the asset. Note that it is unclear whether the grandfathering will continue to apply if these assets are transferred (e.g. as part of an inheritance or bequest). Note that the same incentives apply to new investors in newly built dwellings which will also be eligible for the negative gearing tax treatment.
More generally, the carve out for new means investment in newly built dwellings will be significantly more attractive compared to investment in existing dwellings. Currently, 18% of new investor finance approvals are for the construction or purchase of newly built dwellings. About half of property investors are negatively geared, implying this is an important consideration for about half of all investor purchases (i.e. around 110k a year over the last year).
While there are other important considerations for buyers considering new vs existing – including cost, delivery risk and capital gain expectations – it is likely that at least some prospective investors will switch. The implication is that sharply lower investor activity will also skew more heavily towards new, the share potentially rising towards 40–50% of new investor loans.
Lastly, the new minimum tax rate on CGT reduces the tax advantage of realising capital gains when income is low. Capital gains tax is applied upon realisation, i.e. sale of the asset, with the taxable portion added to income in the year and taxed at an individual’s marginal tax rate. As such, there has been a strong incentive for individuals to realise gains in years when their incomes, and therefore their marginal tax rates, are low, e.g. when they are retired or between jobs. The new minimum tax rate of 30% reduces this incentive. Treasury figures show the average marginal tax rate on capital gains over the last 13 years was 25%, and 7ppts lower than the individual’s average marginal tax rates over the 15 years prior.
Current settings have the tax-free threshold at $18.2k with the lowest 16% rate applying up to $45k where the next 30% rate cuts in. The introduction of a 30% minimum rate raises the rate on up to $45k of any taxable capital gain an individual records – equating to $9.2k. The behavioural consequences here are a little harder to discern. The minimum rate is still below the 37% and 45% marginal rates, so sellers can still reduce tax by realising gains in low income years, but the size of the potential benefit is not as large.
Wider backdrop
The wider housing market context is important to assessing how these changes will impact. Here, there are three key elements:
- Rising interest rates. The RBA’s three 25bp increases in February, March and May have taken official interest rates back to the restrictive levels that were prevailing through 2023–24. These moves already appear to be weighing on activity and prices in some markets. With inflation risks still elevated, we expect two more 25bp interest rate increases from the RBA in coming months.
Tight supply. Despite some cooling in demand, most of Australia’s housing markets continue to see tight supply with conditions extremely tight in several capital cities. Rental vacancy rates have been holding around historical lows since mid-2023 and are below 1% in Brisbane, Adelaide and Perth. On-market supply has also been low with total listings across the major capital cities dropping to just two months of sales late last year, a 20yr low. Again, Brisbane, Adelaide and Perth stand out as having particularly tight on-market supply compared to history.
Robust population-driven growth in physical demand. The underlying physical demand for housing, which relates back to population growth and household formation rates, has been relative solid in recent years and is expected to sustain at its recent pace. Population growth has been robust, holding at 1.5%yr. This was a key factor in the market’s resilience through the 2022–24 interest rate tightening cycle, with an initial price correction in 2022 followed by a surprisingly strong rebound in 2023 and 2024.
Bottom line
On balance, Westpac expects the combination of higher interest rates and tax changes to result in:
A 34% fall in new investor activity with the mix skewing more towards newly built dwellings. The fall is expected to see growth in the total value of outstanding investor credit slow from around 9.5%yr at the moment to below 7%yr at the end of this year and around 4.0%yr at the end of 2027 (noting that there will be mixed impacts on investor loan repayments with an incentive for existing investors to refrain from selling but also to hold more debt against these properties through refinancing and/or repaying loans more slowly). The share of newly built dwellings is expected to rise from 20% to around 40%, rising in absolute terms despite the fall in total investor activity.
A 20% decline in total dwelling turnover – led by the slowdown in investor demand, and, on the supply side, few investor properties being sold. The interest rate tightening is also expected to drive a material slowing in owner-occupier activity.
A stalling in dwelling price growth, which is now expected end flat for 2026 across the major capital cities – Sydney and Melbourne are expected to see outright declines (–3% and –4%) with growth remaining positive but slowing more abruptly in Brisbane (9%), Perth (13%) and Adelaide (7%). Note that this implies a modest 2% decline nationally over the second half of the year, with prices having risen 2% over the year to date.
Medium to longer term shifts
Beyond 2026, other trends are likely to emerge over the next 2–3 years, including:
- A gradual firming in average rental yields as markets move to ‘equalise’ the change in after-tax investment returns. The shift implies some combination of lower prices and higher rents compared to baseline. Our indicative estimates suggest a 0.5ppt rise in average gross rental yields requires variations in both of around 3–7ppts.
A gradual rise in dwelling approvals as more investor activity is directed towards newly built dwellings. The scale here is highly uncertain as it depends not only how much investor activity switches but also on how well the residential building sector can meet this shift in demand and how much ‘crowding out’ of owner occupier demand for newly built dwellings occurs. Notably, Treasury’s modelling of the tax changes points to lower rather than higher construction, presumably with the downward adjustment to dwelling prices a key factor discouraging building activity. It is unclear how well this modelling captures the ‘carve out’ for newly built dwellings. With essentially no information available on the elasticity of substitution between existing and new dwellings for investors, this may simply have been too hard to model at all. Near-term, some additional headwinds are also in the mix – aside from higher interest rates and uncertainty there is also a significant lift in construction costs that is affecting both the starting price point of new dwellings and the perceived risks about their final delivery and cost. Nonetheless our sense is that this aspect of the tax changes has been under-estimated and that the changes will drive an eventual lift in new dwelling construction, in the order of 15–30k pa.
Higher housing-related inflation in the transition. At the margin, the gradual increase in rental yields and switch in investor demand from existing to newly-built dwellings could see slightly firmer inflation in rents and home purchase costs (the latter reflecting the cost of the structure component of newly built dwellings). The cost of existing dwellings is not in scope for CPI.
The extent of both of these changes rests heavily on how investors respond to the tax changes, especially on how much purchases shift from existing to newly built dwellings. If the shift is small, there is likely to be a bigger lift in rental yields and a smaller boost to new dwelling construction. If the shift is large, rental yields will tend to be lower and the lift in approvals bigger.
Over longer horizons, the policy changes are likely to lead to more fundamental, structural changes in the housing market, includingThe reforms include some important exemptions, including:
- Increased ‘landlordism’ – it will still be possible to negatively gear within a property portfolio, i.e. to offset net rental losses on one property against the rent and capital gains from other rental properties. This implies that owners of multiple rental properties will be able to spread their losses across their whole portfolio, while owners of one or two properties will only be able to carry losses forward. Over time, it is possible that ownership of rental properties becomes more concentrated among specialists in this business, whether as individual landlords or corporate and institutional ownership.
Changing composition of rental housing stock. Holding periods will lengthen for properties that remain eligible for the previous negative gearing treatment (grandfathered and new purchases of newly built properties). This will also reduce the churn renters experience when owners sell, potentially improving renters’ security of tenure. The share of new-build in the rental stock will also rise, likely meaning that apartments and new detached houses in greenfields subdivisions will make up a higher share of the rental stock over time (relative to detached houses and dwellings in established areas). Detached homes in established suburbs may become relatively scarcer even if grandfathered properties are held for longer on average. These changes imply relative price shifts, but probably not for the market overall.
More muted price cycles. Investor activity is typically more cyclical than the owner-occupier segment. As different tax treatments encourage longer holding periods, we expect that this difference will moderate. This implies that demand for housing more broadly could be less cyclical, and price cycles smaller. This also suggests that asset price channels could become less important parts of monetary policy transmission, though this depends on whether the behaviour of the (expanded) owner-occupier sector also changes.
Risks and uncertainties
There are many uncertainties around these changes and their impacts.
The changes have yet to be legislated. The government is due to present the main changes to Parliament on May 28. It has a majority in the House of Representatives but will need the support from other parties to pass legislation through the Senate. In practice that means it will need to support from the Greens.
There is some risk of housing markets encountering an ‘air pocket’ short term. Lower turnover and uncertainty about the impacts of the tax policy changes mean we could see sharper price movements, particularly with the RBA also expected to raise interest rates further in the second half of the year. This risk is mitigated somewhat by grandfathering provisions (which mean there is unlikely to be significant selling by existing investors) and positive price expectations, which initial post-budget surveys suggest remain well-anchored (see here).
Low investor interest in ‘newly built’ dwellings could also see a bigger fall in investor activity and more muted impact on new dwelling constructions. particularly given high building costs and uncertainties around delivery.
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