2026 Budget: Updated housing outlook

What are the policy changes?

The Federal Budget has introduced a significant change to the tax treatment of residential property investment. The package is centred on two reforms: limiting negative gearing for residential property to new builds, and replacing the 50% capital gains tax discount with cost base indexation and a 30% minimum tax rate.

The Budget also includes a range of supporting housing measures, including a new $2bn Local Infrastructure Fund, an extension of the ban on foreign purchases of established dwellings, strengthened affordability requirements for build‑to‑rent tax concessions, and additional support for social and affordable housing.

Negative gearing

The most important change is to negative gearing. From 1 July 2027, negative gearing for residential property will be limited to new builds that add to housing supply. Investors who acquire established dwellings after the announcement will no longer be able to immediately deduct net rental losses against their income. Instead, losses on affected established dwellings will be quarantined and carried forward, rather than used to reduce taxable income in the year the loss is incurred.

Negative gearing will remain available for newly built dwellings. Investments that support government housing programs, including affordable housing, will also be exempt. This means the change is designed to reduce investor demand for existing housing stock while preserving tax support for investment in new supply.

Existing investment properties will be grandfathered, so arrangements will not change for existing investors. This reduces the risk of forced sales, but it also creates a lock‑in effect by giving existing investors a stronger incentive to hold rather than sell.

CGT discount

The second major change is to capital gains tax. From 1 July 2027, the existing 50% CGT discount for individuals, trusts and partnerships will be replaced with indexation and a 30% minimum tax rate. Investors will no longer receive a fixed 50% discount on nominal capital gains under the new arrangements. Instead, taxable gains will be calculated after adjusting for inflation, with real gains subject to the minimum tax rate where relevant.

This changes the after‑tax return profile of housing investment. Under the previous system, investors benefited from a large tax concession when nominal house price growth was strong. Under the new system, the tax outcome depends directly on the real capital gain.

Investors will still be protected from paying tax on the inflation component of the gain, but gains above inflation will be taxed at the investors marginal tax rate. Transitional arrangements mean the new rules apply only to gains arising after 1 July 2027. The main residence CGT exemption and superannuation tax arrangements are not affected.

Other housing policy changes

The package also includes supporting housing measures. These include a new $2bn Local Infrastructure Fund to help fund last‑mile infrastructure for new housing, an extension of the ban on foreign purchases of established dwellings until 30 June 2029, strengthened affordability standards for build‑to‑rent developments, ongoing Commonwealth Rent Assistance support, and additional funding for social and affordable housing. 

What is the effect of these policy changes on investors?

The largest near‑term impact comes from the removal of negative gearing for established dwellings. Negative gearing affects investor cash flow each year a property is loss‑making. By contrast, the CGT change affects the after‑tax return on sale and depends heavily on the path of inflation and house price growth.

Negative gearing

Removing negative gearing increases the upfront after‑tax cost of holding an established investment property. The effect is largest for investors with high marginal tax rates, high leverage, low rental yields and high interest expenses. That is, the investors most likely to have been negatively geared under the previous rules.

On these illustrative assumptions, the removal of negative gearing is equivalent to roughly a 90‑155 basis point increase in investor mortgage rates in immediate cash‑flow terms.

But this ignores an important feature the negative gearing changes. Under the Budget design, quarantined losses may be carried forward and used against future residential rental income or residential property capital gains.

Some of the tax benefit may therefore still be realised later. This benefit is delayed, less valuable in present‑value terms, and no longer helps investors fund annual holding costs. But it will undoubtedly reduce some of the effect of this policy change on broader housing market conditions.

CGT indexation

The effect of the change to indexation for the CGT discount is nuanced. Replacing the 50% discount with indexation does not always increase the tax burden. The effect depends on the relationship between inflation and house price growth, as well as the investor's marginal tax rate and the new 30% minimum tax rate.

If house prices rise only modestly above inflation, indexation can be more favourable than the previous 50% discount because the investor is only taxed on the real gain. But if house prices rise strongly in real terms, the new system is less favourable because the investor no longer receives a 50% discount on the full nominal gain.

With inflation at 2.5%, indexation becomes less favourable than the 50% CGT discount when annual house price growth is around 4.5‑5%, depending on the holding period. With a 10‑year holding period, indexation is equivalent the 50% CGT discount with annual price growth around 4.8%. Below that, indexation can be more generous. Above that, the previous CGT discount was more generous.

One unexpected announcement on the CGT change is that investors who acquire new homes will be able to choose either the existing 50% CGT discount or the new indexation and minimum tax treatment when they sell. This will further increase the incentive for investors to purchase new homes.

What is the effect of these policy changes on the broader housing market?

The combined effect reduces the attractiveness of established dwellings as investment assets, though there are some offsets that limit the overall effect on prices. Notably, the ability to quarantine losses reduces some of the potential downside effects of the negative gearing change.

House prices

To assess the impact on housing prices, I have used a modified version of the RBA’s ‘Saunders‑Tulip’ housing model.

The combined effect of the changes to negative gearing and the indexation of the CGT discount are expected to see house prices just under 3% lower than they otherwise would have been. In the absence of quarantining of losses, this response of house prices was instead around ‑5%.

The house price impact is likely to be concentrated in market segments where investor participation is highest. Apartments, townhouses and lower‑priced established dwellings are likely to be more affected than owner‑occupier‑dominated detached housing markets.

These estimates are within the range of estimates from other research, though this previous research typically assessed a stronger policy stance with no quarantining of losses and a flat reduction in the CGT discount (generally to 25%). Under these assumptions, this research has found there would be a small effect on dwelling prices, around ‑1.0% to ‑4.5%.

The effect on prices is also estimated to be gradual. It takes three years for house prices to be 2% below their baseline, with the peak drag on house price growth only reaching ‑1.0%pts.

However, there is risk is that the drag on prices could be larger or quicker than our estimates suggest. In a scenario where quarantining provides a smaller offset and CGT indexation has a larger effect on demand, our modelling suggests house prices could eventually be around 5.5% below their baseline level.

There is also a risk that house prices respond more sharply in the short term due to shifts in sentiment. If that occurs, price growth could slow by more than implied by fundamentals alone over the coming year.

Rents

There is likely to be only a very small and gradual impact on rents. The reform reduces the after‑tax return from buying established dwellings as rental investments. In isolation, that could gradually reduce the supply of rental housing in the established market over time. However, the impact on overall housing supply is likely to be very small, and potentially positive. Given the strong relationship between housing supply and rents growth, we expect the overall impact on rents to be muted. Treasury estimates that rents could increase by around $2 per week for a household paying the current median rent, which is broadly in line with our estimates.

Construction activity

The impact on construction activity is ambiguous, though we expect the combined effect of all policies is neutral to slightly positive for supply.

Retaining negative gearing for new dwellings should redirect some investor demand from established properties toward new builds, supporting construction activity, particularly for apartments where investor pre‑sales are important.

The Budget also includes supply‑side measures, including the $2bn Local Infrastructure Fund, which is intended to support enabling infrastructure for new housing.

However, the CGT changes reduce the expected after‑tax return from housing investment more broadly. Investors may also factor in weaker expected capital gains if the reforms lower future dwelling prices. That could reduce investor appetite for housing overall, including some new dwellings.

At the same time, elevated construction costs could make new housing less attractive to investors and reduce the availability of supply. The Budget notes that the Middle East conflict has increased costs for key inputs, including fuel and plastics, and that PVC‑related price pressures have flowed into some plumbing material prices. Higher construction costs can reduce project feasibility and make new projects harder to pre‑sell or finance. We have recently taken a deeper look at this issues here.

The net effect will depend on whether the incentive to buy new dwellings, supported by the exemption from negative gearing changes and the Budget's housing supply measures, is strong enough to offset the broader reduction in investor demand for housing. We expect that it will be, but there is some uncertainty around this.

Turnover

Housing turnover is likely to fall, at least initially. Grandfathered investors have a stronger incentive to hold existing properties because selling would mean losing access to the previous tax treatment. New investors may also delay decisions while the market adjusts to the new rules. This lock‑in effect could partly cushion prices by reducing listings, but it would also reduce market liquidity.

First‑home buyers

For first‑home buyers, the reforms should reduce investor competition in the established market, which is the clearest affordability channel. However, the benefit is unlikely to fully match the fall in investor demand. Existing investors may hold rather than sell, reducing listings. Others may shift toward newly built dwellings, where negative gearing is retained. As a result, first‑home buyers should face less competition, but the affordability gains may be partly diluted by lower turnover and demand shifting elsewhere.

Overall assessment

The Budget changes represent a negative shock to the after‑tax return on established investment housing. The dominant effect is the removal of negative gearing. The CGT change reinforces the shift by reducing the tax advantage attached to strong nominal capital gains. The combined effect should lower established dwelling prices relative to the previous baseline, modestly increase rental pressure over time, reduce turnover, and provide some relative support for new construction - provided projects remain financially feasible.

What is our updated outlook for housing price growth?

A lot has happened since we last updated our housing price forecasts in early March. In addition to the housing policy changes, the outlook for the cash rate has also changed, while the ongoing conflict in the Middle East has created a much more uncertain environment and increased housing construction costs.

We have now updated our forecasts to reflect the combined effect of these forecasts. Dwelling price growth is expected to slow to 3% over the year to December 2026, a step down from our previous estimate for growth to be 5%. Growth over the year to December 2027 remains unchanged at 3%.

The slowdown over the coming year primarily reflects the effect of higher mortgage rates, with the three cash rate hikes this year to date adding to borrowing costs and cooling buyer sentiment. These three hikes have subtracted 1.5 percentage points from our 2026 price growth forecasts.

The restriction of negative gearing for established housing and the replacement of the CGT discount with indexation and a 30% minimum tax rate will also weigh on prices. We estimate this policy change will subtract 0.6 percentage points from annual price growth by the end of this year and just under 1 percentage point from growth over 2027.

Our assumption for population growth is unchanged from the March update, with the expected easing of population growth subtracting a further 0.8 percentage points from our 2027 forecast.

While fundamentals suggest that the impact of the housing policy changes on prices should be small, a key risk is that there is a larger short‑term response of house prices due to the effect of these policy changes on sentiment. If this occurred, price growth could ease by more than we expect based on fundamentals alone over the coming year.

Read Trent Saunders' full analysis