The Labor Government has proposed a significant change to negative gearing, removing the ability to offset property investment losses against personal income (negative gearing), while maintaining an exemption for new builds.
This announcement, which has caught many by surprise, echoes the policy that contributed heavily to their loss in the 2019 “unlosable” election. Below is a clear analysis of how this change is likely to play out in the short to medium term, based on economic realities and rational investor behaviour.
Developers will be tempted to price new properties at a premium, capitalising on the ongoing tax benefits for investors. For example, an investor who gains around $13,000 per year in tax relief (on a new property), equates to a net present value of approximately $95,000 over 10 years. In theory, developers could add an $80,000–$90,000 premium to new homes.
However, rational investors understand a critical flaw: the moment a new property settles, it becomes “established.” The negative gearing advantage disappears for the next buyer, causing an immediate drop in resale value. This significantly undermines any premium pricing.
In a two-tiered market, lenders can be expected to tighten lending criteria, potentially requiring deposits of 25-30% on new properties. Banks will price in the higher risk of being left with a property that may be worth less in the established market if a borrower defaults. This makes new properties less viable for both investors and many first-home buyers.
As investors step back from new developments and find established properties less attractive due to higher cash outflows, rental supply will tighten further. With national vacancy rates already at just 1.2%, population growth of 500,000–600,000 per year, and building approvals below 200,000, rents are likely to rise significantly.
Property prices will eventually adjust to restore competitive yields through a combination of moderated prices and higher rents.
Higher rents combined with larger required deposits for new properties will make it even harder for first-home buyers to save and enter the market; the opposite of the policy’s intended outcome.
Rising construction costs continue to challenge developers. Even if they attempt to pass these on via higher prices supported by tax incentives, they still need willing buyers; many of whom may have already withdrawn from the market.
When property investors reduce exposure to residential investment, common alternatives include:
- Topping up superannuation
- Investing more heavily into their Principal Place of Residence (PPOR),which remains tax-free, especially with recent CGT indexation changes
- Shares and ETFs
- Commercial property
Well-located mid and premium PPORs are likely to benefit from this capital rotation, as are commercial assets in the short term. Over time, residential rents should rise to deliver returns more comparable with commercial property.
This policy shift will take a little time to fully flow through to prices and rents, but with a ~14-month implementation delay, there is a realistic possibility the changes may be delayed, modified, or even shelved once the broader market impacts become visible.
For patient, sophisticated investors, quality residential investment property remains a strong long-term option. Success will come down to discipline and fundamentals:
- Locations featuring strong population growth, infrastructure investment, and limited new supply
- Properties that are unique or scarce, with low ongoing holding costs
By focusing on these criteria, property investments should continue to perform well in the medium to long term.
If you’re reviewing your investment strategy in light of these developments, feel free to reach out. I’d be happy to discuss how this may affect your portfolio and explore suitable opportunities aligned with your goals.
Important: This is general information only and not financial advice. Please consult your accountant, financial adviser, or tax professional for advice tailored to your personal circumstances.