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.
