Following several press releases during the week that have leaked potential Federal Budget measures, we have reviewed the reported "leaked" policy settings and modelled their possible impact on residential property investment.
If the Federal Government implements the proposed changes, the overall impact on property investment is likely to be modest, with the status quo largely remaining intact.
The key policy settings being discussed include:
- Limiting negative gearing to a maximum of two investment properties, with newly built properties exempt from this cap
- A return to CGT indexation, taxing only real (inflation-adjusted) capital gains
- Allowing new properties to choose between indexation or the existing 50% CGT discount
- Grandfathering provisions for existing investments
The potential policy illusion
The headline narrative may focus on enhanced tax incentives for new housing.
However, investor behaviour may not immediately follow that narrative.
If negative gearing becomes limited to two properties, the near-term response from many investors could be to maximise their allocation using established properties first, capturing full negative gearing benefits before considering new builds.
It is important to remember:
Around 90% of Australian property investors own two or fewer investment properties.
| Investor Stage | Properties Owned | Typical Household Income | Share of Investors |
|---|---|---|---|
| Entry Investor | 1 | $80k–$150k | ~71% |
| Accumulator | 2 | $130k–$220k | ~19% |
| Portfolio Builder | 3–5 | $180k–$350k+ | ~9% |
| Professional Investor | 6+ | $300k+ / asset driven | <1% |
Key Note: This distribution matters as policy changes targeting large portfolios affect only a very small portion of the market.
Will CGT changes push investors toward new housing?
The genuine differentiator may instead be the CGT treatment available to new properties, where investors could choose their preferred taxation method.
Using the following assumptions:
- Purchase price: $1,000,000
- Capital growth: 7% CAGR
- Inflation: 3.5%
- Holding period: 10 years
- Excluding acquisition and selling costs
CGT Outcome Comparison
| Item | 50% CGT Discount | Indexation (3.5% Inflation) |
|---|---|---|
| Purchase Price | $1,000,000 | $1,000,000 |
| Sale Price | $1,967,151 | $1,967,151 |
| Nominal Gain | $967,151 | $967,151 |
| Taxable Gain | $483,576 | $556,551 |
| Tax Payable | $227,281 | $261,579 |
| After-Tax Profit | $739,870 | $705,572 |
Difference after 10 years: approximately $34,398.
The key question becomes:
Is this difference large enough to materially change investor behaviour?
In higher inflation environments, indexation becomes more attractive.
In lower inflation environments, investors may prefer the 50% CGT discount.
The advantage exists, but it is relatively marginal over a typical holding period.
Headwinds facing new property investors
Even with potential tax advantages, several practical challenges remain for new housing:
- Rising construction costs
- Developers potentially pricing in future tax benefits
- Loss of “new property premium” once resold on the secondary market
If developers increase pricing to reflect tax incentives, investors may effectively pay upfront for benefits realised far into the future.
Will these policies drive rents higher?
Probably not.
If policy changes leave the broader investment landscape largely unchanged, rental outcomes will continue to be driven by fundamental supply and demand dynamics:
- National vacancy rates near 1%, reflecting constrained supply
- Population growth running at approximately 550,000–650,000 people per year
- Elevated interest rates delaying first-home buyer transitions into ownership
These structural factors remain far more influential than tax settings.
Likely investor behaviour
Under these scenarios, a probable investor strategy emerges:
- Short to medium term: Investors prioritise higher-growth established properties while negative gearing capacity remains available.
- Long term: New properties retain modest tax advantages, though the benefit is incremental rather than transformational.
Broader market implications
Additional second-order effects could include:
- Reduced participation from “professional investors” owning three or more properties
- Greater capital allocation toward Principal Places of Residence (PPOR), which remain CGT-free
- Increased positioning of owner-occupied housing as a primary long-term store of wealth, potentially supporting premium market segments
Final thoughts
Ultimately, property investment decisions will continue to come down to individual circumstances.
- Higher-income earners may prioritise established assets to maximise deductions and growth.
- Middle-income households will remain focused on serviceability and holding costs.
- Tax incentives may influence decisions at the margin, but they are unlikely to redefine investor motivations.
From a top-down perspective, these proposed policy settings appear evolutionary rather than disruptive.
If implemented, we expect limited overall market impact, with existing drivers (supply, population growth, and credit conditions) continuing to shape Australia’s property landscape.
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Ben is a former Institutional Equities Trader at highly regarded Investment Bank, JPMorgan. Despite his high-level exposure to the equity markets in Asia and around the world, Ben developed a keen interest in the Australian property market. Utilising his analytical skills, he went on to develop a substantial portfolio through his own renovations and developments.
It was this success in the Australian property market that eventually led him away from his role as an equities trader to focus solely developing his own portfolio and passion for investment property strategy.