Asking rents climb
Tonight's Budget will deliver an increase in the effective rate of capital gains tax, and will limit negative gearing benefits to new builds from 1 July 2027.
The housing market will still be mostly driven by demand from immigration and supply, but this will represent a landmark shift in tax policy for housing from a year's time.
Today the ABS figures showed that permanent and long-term arrivals rose to a new high of 1.165 million.
It looks like the slowdown in net immigration ended back in early 2025, with numbers pumping higher again since then.
The Federal Budget tonight forecasts net overseas migration to ease over the next two years, but on this evidence those hopes may not be realised.
In related news, SQM Research reported a national rental vacancy rate of just 1.2 per cent in April.
Asking rents have reaccelerated, rising by 7.3 per cent over the year, with tax changes to negative gearing set to add renewed pressure to the rental market.
Budget reforms
In the Budget tonight, Treasurer Chalmers introduced wholesale changes to the tax system, that will impact housing in the name of intergenerational fairness, but also in doing so also shares, commercial property, industrial property, and all other assets.
In short...
The Federal Budget announced that negative gearing will be restricted to new build properties from 1 July 2027.
This will see a surge of financial and property advisers recommending off the plan properties from next year, at least until everything ends in a heap.
The Housing Industry Associated has noted that in an already fragile environment for apartment pre-sales the increased uncertainty will reduce rather than increase housing supply, as will the expected slower housing price growth.
Treasury reported that housing price growth will be reduced by 2 per cent, resulting in 35,000 fewer new dwellings being delivered, though the government hopes to offset this by investing in infrastructure for new housing supply.
Negative gearing benefits will be grandfathered for existing investors.
Moving forward...
For new investors in established properties after 1 July 2026 any net rental losses will be carried forward until they sell or the property becomes cashflow positive, when the tax benefit can finally be realised.
It's hard to see how this can result in anything other than a cliff-edge for investment in established rental housing until markets recalibrate.
In terms of market impacts, nationally rental yields of about 3½ per cent for houses and 4½ per cent for units will probably need to rise by at least 50 basis points one way or another.
Whether that comes from lower prices, higher rents, or a combination of the two...result will be granular and dependent on local market conditions.
This remains to be seen over the next couple of years.
But by way of a stylised example roughly a 5 per cent decline in nominal prices and a 10 per cent increase in rents would roughly account for a 50bps increase in rental yields.
Rental markets are extremely tight in Darwin, Hobart, Adelaide, Perth, Brisbane, and Sunshine Coast, so rents will likely increase in these markets.
In other areas, the middle price segments of the housing market will likely be the most impacted.
Top, middle, and bottom
In the upper price points wealthier Aussies are likely to put more wealth into the one remaining capital gains tax free investment, being the principal place of residence.
At the bottom end of the market, rising interest rates and surging construction costs mean that developers have largely stepped away from building entry level units, and this part of the market is being supported by the 5 per cent deposit scheme for first homebuyers.
There will be less incentive for owners of established rentals to repair and maintain properties, and the standard of rental properties is likely to be reduced.
Treasury forecasts than housing prices will rise by 2 per cent less than was expected before the change, though this lower growth is expected to reduce new housing supply by around 35,000 units.
It looks as though changes to the capital gains tax discount will not be grandfathered.
The minimum rate of capital gains tax going forward will be 30 per cent, so equities, stock markets, and risk-taking in business more broadly will also be adversely impacted.
This was a surprising move, as it doesn't seem to align comfortably with the notion of progressive tax legislation.
Treasurer Chalmers also announced the introduction of a 30 per cent minimum tax on the taxable income of discretionary trusts, effective from 1 July 2028, which will mark an end to income splitting and other household cashflow tricks to minimise taxation via trust structures.
Transition period and election
Housing market sentiment is already weak and will likely weaken further following today's Budget, which broke further election pledges (last time around it was $275 off your household energy bills, this time it was a whole bunch of taxes which were apparently off the table a year ago).
The opposition has already stated that it will oppose the changes to negative gearing and capital gains tax, and there will be some challenges getting the reforms through the Senate, which will require the support of the Greens and perhaps some crossbenchers.
This sets the scene for a more keenly contested election in or before May 2028, with the opposition likely to propose a reversal of such reforms.
New Zealand went down a similar route on interest deductibility, but after investment in housing was significantly reduced the changes will quickly reversed with the change of government.
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