Now that the immediate wave of post-Budget analysis has quietened down, a clearer picture of Australia’s future property landscape is starting to form.
The frantic headlines have moved on, leaving behind the structural reality of the most significant property investment tax overhaul in a generation. With the removal of negative gearing for established residential dwellings and a complete restructuring of the capital gains tax (CGT) discount locked in for 1 July 2027, the market is quietly adjusting to a rewritten rulebook.
But away from the political talking points, how will these changes actually reshape the economics of property in the long run?
Angus Moore, Senior Economist at PropTrack, says we now have to look past the initial policy shock and map out the true long-term trajectories for buyers, landlords, and renters.
Of course, predicting the exact path forward requires a degree of caution, simply because Australia has not seen a policy shift of this scale in nearly thirty years.
“When we last saw changes three decades ago, Australia’s housing market looked very different to what it does today,” Angus says.
Yet, by looking at the comprehensive structural modelling, he points to a slow-burn transition rather than the sudden, dramatic market correction many originally feared.
The indexation model: An unexpected silver lining?
Under the pre-Budget framework, property investors were assessed on their raw capital gains and then simply taxed on half of whatever that profit was. From mid-2027, that system is dead for established dwellings. Instead, the original cost base of the property will be indexed to inflation, and investors will be taxed on the full after-inflation gain.
While the initial reaction from industry lobby groups was heavily critical, Angus points out an econometric quirk: a meaningful portion of investors will actually end up paying less tax under this framework.
“The simpler way to think about it is if inflation is, roughly speaking, half of the return on your investment, the two systems are equivalent,” Angus says.
“Prior to 1999, we used to do this model of inflation indexing. We changed in 1999 to this 50% discount for a variety of reasons, but part of the reason was that it was a bit simpler when people were still filing on paper. It was a little bit more complex to track inflation than it is today when everyone files digitally… We know what inflation is. That’s actually a relatively easy calculation.”
Because of this mechanism, investors holding properties in sluggish, low-growth markets will actually come out ahead.
“The reason that some investors are going to be better off is that for some investors, home prices are less than twice inflation,” Angus says.
“For instance, if you’ve held a home in Melbourne between the start of 2022 and today, the return on that has been significantly less than inflation. And so, actually, you’d pay less tax under the inflation indexing system than you would under the previous system.”
The gradual pressure on house prices
For prospective buyers hoping the policy would trigger a swift, massive collapse in property values, the economic consensus provides a reality check, as Angus has outlined in the realestate.com.au Market Insight Report.
Long-term structural modelling clusters around a modest aggregate impact, estimating that home prices will eventually sit just 1% to 5% lower than they otherwise would have been without the policy change.
Crucially, Angus stresses that this will manifest as a gradual mitigation of future growth rather than an immediate market crash, contrasting it sharply with the rapid shocks caused by interest rate hikes.
“We would not expect it to have big immediate effects like something like, say, interest rate changes. Interest rate changes obviously flow through into borrowing capacities quite quickly, and so we tend to see the effect of interest rate changes pretty quickly, you know, within a couple months starting to show up in home prices,” Angus says.
“These changes are probably going to have a slower-burn effect, I would imagine. So we probably will not see them showing up immediately. And it is going to be a bit hard to distinguish the effect of the fact that we’ve seen three rate hikes, and we’re expecting to see more, that effect on home prices from the effect of these tax changes.”
The long-term impact will also be highly segmented. Rather than rippling evenly across the country, the downward pressure will be felt most acutely where investor participation has historically been at its highest.
“We expect to see a more pronounced effect on the segments of the market with high investor participation,” he says.
“Realistically, we are looking at the more affordable end of the market, which is where investors tend to concentrate. We will probably see a greater impact there than at the more expensive end, which tends to be dominated by owner-occupiers.”
The real casualty: A localised crisis for renters
While the long-term price impact for buyers appears manageable, Australia’s rental market is sitting on an exceptionally thin buffer. Treasury’s official baseline modelling claims that aggregate long-term rents will only rise by a minor $2 per week- a figure Angus agrees is relatively small in the grand scheme of things.
However, he cautions that these smoothed-out national estimates mask significant structural risks during the multi-year transition, especially given how punishingly tight current rental conditions already are.
“While the modelling over the long term suggests the impact on rents will not be big, there is a risk in the short term that we see a disproportionate impact because of how tight rental market conditions already are,” Angus warns.
The real danger lies in a structural geographic shift. Because newly built homes are completely exempt from the tax changes to incentivise new construction, investor capital will inevitably migrate over the next decade. Angus warns this will alter where rental properties are physically available, potentially starving established areas of much-needed housing.
“Because of the incentives for investors to buy new, we might see a bit of a shift in where rental properties are provided towards the sorts of out-of-the-line growth areas where we build new homes, as opposed to in more established inner- and middle-ring suburbs,” Angus says.
“This could see more rental accommodation added in outer growth areas that are further from jobs, universities, and other amenities renters typically look for. While there may be downward pressure on rents in these areas from the added supply, the reduced supply in existing areas could see rents in those areas increase by more than aggregate estimates imply.”
The long-term balancing act
Ultimately, the long-term rental outlook relies on a delicate economic balancing act. While critics worry that reduced investor participation will permanently shrink the rental pool, Angus explains that the properties themselves are not going anywhere; they are simply changing hands.
“The balancing act here, and the reason why that sort of long-term effect on rents is estimated to be relatively small, is that while we see fewer investors and therefore fewer rental properties, those homes do not disappear,” he says.
“They get purchased by first-time buyers that previously would have been renters. And so the net effect on the balance between the number of people looking and the number of properties available is relatively unchanged.”