A month on from the announcement of the 2026 Budget, the headlines have largely subsided; however, the implications for the property market remain firmly in focus. In this year’s budget, Treasurer Jim Chalmers handed down what no government has proposed since the 1980s: scaling back negative gearing on residential investment properties and fundamentally phasing out the 50 per cent capital gains tax (CGT) discount on investments.
Now that the political noise has settled, attention has shifted to the questions of what ‘actually’ matters to investors, brokers and lenders alike; Beyond the immediate reactions and predictions that dominated Budget week, what is the real direction the property market is heading? Not the directions forecasted in the heat of Budget week, but what the direction is signalled by the structure of these newly announced reforms.
What actually changed?
Setting aside the headlines, there are two main reforms at the core of the budget package:
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Negative Gearing
Negative Gearing on residential property is being limited to new builds from 1 July 2027. Established investment properties purchased after 7:30pm on Budget night (12 May 2026) will have their rental losses “quarantined”, deductible only against other residential property income or future property capital gains, but not against wages or business income. Anything held (or under contract) before Budget night is ‘grandfathered’ until sold.
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50% Capital Gains Tax
The 50 per cent CGT discount for individuals and trusts is being replaced from 1 July 2027 with cost base indexation, adjustments to purchase price for inflation, alongside a minimum 30 per cent tax rate on gains. Critically, the change only applies to gains occurring after 1 July 2027. Growth banked before that date keeps the old 50 per cent treatment, with valuations setting the dividing line.
Alongside these reforms are a number of notable exemptions. New builds keep both negative gearing and the choice of old or new CGT treatment, while build-to-rent developments, widely held trusts and superannuation funds are exempt. The package is further supported by a $2 billion ‘Local Infrastructure Fund’ and an extension of the ban on foreign purchases of established dwellings.
Back to the Future
What much of the commentary has overlooked is that these reforms are far from unprecedented. In many respects, they represent a return to earlier policy settings rather than a fundamental departure from them.
Indexation of the cost base was part of Australia’s original capital gains tax (CGT) design when introduced by Paul Keating in 1985. That framework remained in place for 14 years before the Howard Government replaced it with the 50% CGT discount in 1999.
Negative gearing has followed a similar trajectory. In 1985, the Keating Government quarantined rental losses, only to reverse the policy in 1987 amid concerns about a rental crisis. Subsequent analysis, however, suggested that pressure was largely concentrated in markets such as Sydney and Perth, where vacancy rates were already tight prior to the change.
Viewed in this context, the 2026 Budget is less a structural break than a partial restoration of the policy environment that existed between 1985 and 1999. The legacy of the 1987 reversal, combined with the political sensitivity of debates in 2016 and 2019, helps explain why it has taken decades and a carefully grandfathered design to revisit these settings.
International experience reinforces this pattern. The United States effectively curtailed negative gearing for passive investors under the Tax Reform Act of 1986, while still supporting a large and liquid rental market. In the United Kingdom, reforms between 2017 and 2020 progressively removed mortgage interest deductibility for landlords, replacing it with a basic-rate tax credit and driving a shift toward corporate structures rather than market disruption.
New Zealand offers the closest parallel. In 2021, it removed interest deductibility for existing residential properties while exempting new builds, closely mirroring Australia’s approach. Within three years, however, elements of the policy were being reversed following a change in government. The lesson is clear: such reforms can be absorbed by markets, but their long-term durability ultimately depends on political support.
What Nobody is Talking About: The Lock-In Effect
Most analysis has focused on how the changes affect demand. However, the more interesting question relates to what grandfathering does to supply.
Every established investment property held before Budget night retains access to negative gearing, but only until it is sold. This creates a strong incentive for thousands of existing investors to hold rather than transact, as selling would mean forfeiting their tax position that cannot be regained. Economists refer to this as the ‘lock-in effect’; it points to fewer established listings, lower turnover, and somewhat counterintuitively potential price support for existing stock, even as new investor demand for it weakens. The doomsday scenario of grandfathered investors rushing for the exits gets the incentive exactly backwards: the rational move is to never sell.
A more subtle shift also worth noting is reforms directed squarely at residential property. Commercial real estate assets such as office, industrial, retail, and mixed-use remain unaffected. Investors can still fully offset losses on commercial assets against other income, and SMSF and widely held trust structures sit outside the new rules entirely. On a relative basis, the tax treatment of commercial property has effectively improved without any explicit policy change, and capital tends to respond to such relative shifts. Together with the institutional exemptions, the package subtly redirects property investment toward two areas: new residential supply and commercial assets, both of which sit more naturally within business-purpose lending than the traditional mum-and-dad established housing market.
The Other Side Of The Coin
None of this is to say that headlining arguments against the reforms lack substance. Commonwealth Bank of Australia economists now expect national home prices to be broadly flat in 2026, with the tax changes amplifying a slowdown that is already underway. Auction clearance rates have softened since the Budget, days on market are increasing, and new investor lending is forecasted to fall to roughly half of late 2025 levels. Their modelling suggests established prices could sit around 3 per cent below where they would otherwise have been, with modest upward pressure on rents over time as the pipeline of investor activity in existing stock diminishes.
Negative gearing currently costs the budget around $11 billion per year in foregone revenue, and removing a subsidy of that magnitude from a segment of the market is far from costless. The new-build exemption also runs into an important constraint; construction costs have risen by 30 to 40 per cent since 2021, and a tax concession alone does not render an otherwise unviable project feasible.
The shift to indexation also embeds a more subtle assumption about inflation. At 2.5 per cent inflation, investors would need to hold assets for many years before indexation matches the value of the previous 50 per cent CGT discount. As a result, shorter hold, higher-growth strategies are the most exposed under the new reforms.
What to monitor Post-Budget
Looking forward, there are four key areas to monitor following the budget:
The Senate
The package passed the House on 4 June, but amendments in the Senate chamber could still soften the edges.
Transaction pulse before 1 July 2027
Investors who want established property under the old negative gearing rules have a closing window, and new build buyers have every reason to act while both regimes remain open to them.
The slow rotation of capital
Toward new supply, build-to-rent, commercial assets, and yield-driven (rather than tax-driven) strategies- where positive cash flow is about to become the default underwriting standard, not the exception.
The political cycle
New Zealand reminds us that what one government legislates, the next can unwind. For lenders and brokers, the directional move is clear enough. The era of the tax-subsidised, loss-making established rental is closing. The era of cash-flow discipline, new supply and business-purpose credit is opening. Markets reprice around tax settings; they always have! But they rarely stop moving.
The Opportunity Ahead
As traditional property investment settings continue to evolve, we expect many investors will reassess where they seek income, diversification, and exposure to real assets. With the CGT discount being wound back and negative gearing restrictions on established property, the after-tax appeal of direct property investment is likely to shift.
In this environment, the opportunity is not simply in the policy change itself, but in how capital responds to it. The next phase of growth will increasingly favour those positioned to support, fund, and deliver the housing supply Australia needs.
If your clients are seeking clarity on how these changes may impact their borrowing or investment strategy, our team is here to help assess the implications and identify lending solutions aligned with their goals.
