Australia's 2026 Budget Housing Tax Changes

Executive summary

The 2026–27 Federal Budget changes the investment equation for residential property by limiting negative gearing to new builds and replacing the 50% capital gains tax discount with indexation plus a 30% minimum tax on real gains from 1 July 2027 (Budget 2026–27 tax reform). Treasury estimates around 75,000 additional owner-occupiers over the next decade and house price growth around 2% lower over a couple of years than it would otherwise have been (Budget CGT & negative gearing explainer).

The policy may improve access for some first-home buyers in the established market, but the medium-term effect is more complex than "prices fall, affordability improves." The new rules create a dual market: existing dwellings become less attractive to new investors, while eligible new builds retain negative gearing and a more favourable CGT choice. That design could help younger Australians buy established homes at slightly lower prices, but it may also direct them into assets with weaker investor support, higher future tax drag, and greater exposure to the difference between land value, building value and replacement cost.

What the Budget changes

The Budget replaces the 50% CGT discount with cost-base indexation for assets held more than 12 months, with a 30% minimum tax on net real capital gains from 1 July 2027 (Budget Paper No. 2). The changes apply to individuals, trusts and partnerships. Transitional arrangements mean the current 50% discount continues to apply to gains accrued before 1 July 2027.

Negative gearing will be limited to new builds from 1 July 2027, with established residential property acquired after 7:30 pm AEST on 12 May 2026 only able to deduct losses against residential property income or residential property capital gains (Budget CGT & negative gearing explainer). Unused losses on affected established properties can be carried forward, but cannot reduce wage or salary income in the year incurred.

Existing investment properties held before Budget night are grandfathered for negative gearing purposes until sold, including properties under contract before the announcement time. Eligible new residential properties retain access to negative gearing and allow investors to choose between the existing 50% CGT discount and the new indexation-plus-minimum-tax regime on disposal.

The central market shift

The policy deliberately creates different incentives for new and existing dwellings. A new investor buying an established dwelling after Budget night loses the most valuable short-term cash-flow benefit of negative gearing, while a new investor buying an eligible new build can still deduct rental losses against other income. That distinction should reduce the amount some investors can justify paying for established stock, particularly where the investment case relied on annual tax offsets rather than immediate rental yield.

The Government's 2% price effect should be read as "lower than otherwise," not as a uniform fall in current values. The Budget factsheet describes the estimated impact as house price growth being around 2% less over a couple of years relative to no tax change, and Grattan's earlier modelling similarly described property prices as up to 2% lower than they would otherwise be (Grattan Institute).

The policy therefore changes the marginal bidder rather than the entire market. Owner-occupiers are not subject to CGT on their main residence, and they do not need negative gearing to justify the purchase of a home to live in. Investors, by contrast, price assets partly by after-tax cash flow, after-tax capital gain and the ability to absorb short-term losses.

Implications for younger Australians

Younger Australians may see a genuine opening in the established market if investor competition eases. The Budget factsheet notes home ownership for households aged 25 to 34 fell by seven percentage points between 2001 and 2021, and the Government's stated objective is to level the playing field for first-home buyers. If the policy removes some investor demand from established dwellings, younger buyers may gain a small price and competition advantage in precisely the part of the market they are most likely to enter.

The risk is that younger buyers may be pushed toward established dwellings because investors are being pushed toward new builds. That may improve the initial purchase opportunity, but it could also mean younger buyers are buying into a segment with weaker future investor demand and a less favourable tax profile if they later convert the property into an investment.

The affordability gain may also be diluted by serviceability constraints. Cotality reported that properties under first-home-buyer scheme price caps rose 6.7% in the six months to March 2026, compared with 3.6% for properties above the caps (Cotality). ABS lending data shows first-home-buyer loan commitments rose 6.8% in the December quarter of 2025, while investor commitments rose 5.5% (ABS Lending Indicators).

The National Housing Supply and Affordability Council reported that the share of median household income needed to service a new mortgage remained elevated at 45.9%, and that the number of years needed to save for a mortgage deposit had reached 11.2 years (NHSAC State of the Housing System 2026).

Existing dwellings: where the discount is most likely to show up

The largest effect is likely to occur where the marginal buyer was an investor rather than an owner-occupier. Established units, lower-priced houses, outer-suburban dwellings, and high-rental-yield suburbs are more likely to experience investor withdrawal or reduced bidding depth. By contrast, high-quality family homes in land-constrained suburbs may be less affected because owner-occupier demand often dominates the price-setting process.

Established dwellings bought by investors after Budget night will no longer allow rental losses to be offset against salary and wage income from 1 July 2027, which reduces the after-tax value of the same rent stream for leveraged investors. That does not mean established properties become poor assets — scarcity, land value, school zones, transport, zoning, renovation potential and owner-occupier demand can still dominate value.

Grandfathering may also reduce forced selling by current investors. Existing investors who held properties before Budget night can continue under the old negative gearing arrangements until disposal, which gives them a reason to retain assets that would be less tax-effective to replace.

New builds: why tax benefits may not automatically create affordable supply

New builds receive the strongest tax preference under the policy. Eligible new builds retain negative gearing, and investors can choose the better CGT outcome between the existing 50% discount and the new indexation-plus-minimum-tax regime. This is intended to direct investment toward additional supply rather than existing housing stock.

The constraint is that new supply is not infinitely elastic. The National Housing Supply and Affordability Council estimated that about 980,000 new homes were expected over the Accord period before the latest cost pressures, compared with the 1.2 million-home target, and it expected the target to be met only by September 2030 (NHSAC). NAB reported that around 235,000 dwellings remained under construction, about 35% above the pre-pandemic average (NAB Housing Monitor).

Construction cost pressure also matters because a tax incentive cannot make an uneconomic project feasible by itself. Realestate.com.au reported that apartment deliveries had fallen more than 40% from their peak, construction costs remained 30–40% above pre-pandemic levels, and land prices had risen more than 75% since 2020 (realestate.com.au).

Will new and old dwellings stay roughly the same in value?

New and existing dwellings are connected by substitution, but they are not the same asset. Buyers can compare a new apartment with an older apartment, or a new house-and-land package with an established house, so relative prices cannot diverge indefinitely. However, the market can sustain meaningful differences where the assets offer different tax treatment, location, land content, depreciation, maintenance risk, amenity, strata costs, or development potential.

The valuation question is best answered by separating land from improvements. Land is scarce and location-specific, while buildings physically age and usually require ongoing capital expenditure. The ATO's capital works rules recognise that building and structural improvement costs are generally claimed at 2.5% per year over 40 years for eligible residential rental property capital works (ATO capital expenses).

For houses, established stock in superior locations may continue to outperform new outer-ring stock because land value and scarcity can dominate building age. For units, the gap is more nuanced — new apartments can carry a premium for amenities, energy performance and lower immediate maintenance, while older apartments may offer larger floorplates, lower replacement-cost exposure, stronger land-to-building ratios in boutique blocks, or better established locations.

Risks and unintended consequences

The first risk is that the policy helps some buyers enter the market but leaves them with weaker future optionality. A young buyer who purchases an established dwelling may benefit from reduced investor competition today, but if they later need to move and retain the property as an investment, the asset may be less tax-effective than an eligible new build bought by an investor under the same policy settings.

The second risk is that new-build tax preferences flow into land prices, developer margins or scarce project stock rather than into broad affordability. The Budget provides a $2 billion Local Infrastructure Fund to support up to 65,000 homes over the decade, but infrastructure funding alone does not remove all construction capacity, planning, feasibility and labour constraints (Budget 2026–27 cost of living).

The third risk is rental-market pressure during the transition. Treasury expects a small rent impact — the Budget factsheet estimating an increase of less than $2 per week for a household paying median rent — while HIA argues restricting negative gearing to new homes could reduce dwelling commencements by about 22,700 over five years and increase rents (Housing Industry Association).

What to watch as the policy takes effect

• New-build versus established spreads: if tax incentives are capitalised into new-build prices, the premium for eligible new stock should widen relative to comparable established stock.
• Investor share of lending by dwelling type: ABS data already showed investor loan commitments rising to 60,445 in the December quarter of 2025, compared with 31,783 first-home-buyer commitments (ABS Lending Indicators).
• Listing behaviour of grandfathered investors: if legacy negative gearing becomes valuable, some owners may hold rather than sell.
• Mix of new supply: if new stock is concentrated in premium apartments or higher-priced house-and-land estates, the policy may add supply without adding much affordable supply.

hovr valuation takeaway

The Budget changes are best understood as a repricing of after-tax demand, not a simple market-wide discount. Established dwellings most exposed to investor bidding are likely to see weaker price growth than they otherwise would have, while new builds may receive additional investor support if supply can be delivered at viable prices.

For younger Australians, the policy may make the first step into established housing marginally easier, but it does not remove the deeper affordability constraints of deposit formation, borrowing capacity, construction feasibility and scarce well-located supply. The fairest assessment is that the reforms may change who competes for which dwellings, but they will not by themselves make housing broadly affordable unless new supply becomes cheaper, faster and better matched to entry-level demand.

For valuation purposes, "new versus old" will matter more than before, but it will not replace the fundamentals. Location, land content, scarcity, income potential, maintenance risk, build quality, strata profile and buyer depth will continue to determine value. The policy changes the tax lens through which investors view those fundamentals, and that is where the medium-term market impact will show up first.