Markets 
Investors are tipped to sink their cash into new apartments, townhouses and units under the Albanese government’s overhaul of property taxes, but spooked public sentiment could deliver a larger-than-expected hit to prices in the short term as people dump their holdings.
The Albanese government says first home buyers will gain an upper hand in property auctions as soon as this weekend, while major banks back Treasury’s forecasts that property price growth will slow by about 2 per cent over three years, with only a marginal impact on weekly rents.
But the property industry is predicting that rents will be driven higher as investors choose to desert the market in favour of other assets, warning Labor it must ditch the changes if they wind up harming the people they are supposed to help.
Tuesday night’s federal budget unleashed a political storm over plans to limit negative gearing and the capital gains tax discount to investors in new build properties from July 2027. The negative gearing changes will be fully grandfathered to protect existing investors, while the new indexed method for taxing capital gains will only apply to gains made after that date.
Housing Minister Clare O’Neil said there was consensus across generations of Australians that “the housing market has become too unfair, and it needs to change”.
“This weekend at auctions, first home buyers will start to have a more level playing field. Many will be bidding against fewer investors and have a better shot at owning their own home,” she said.
Treasury budget papers forecast the changes would slow property price growth by 2 per cent in coming years, and lift the median weekly rent by up to $2. This will lead to 35,000 fewer homes being built over the decade. But they said other budget measures to boost housing supply should offset this by encouraging a further 65,000 new builds.
Banks and economists largely backed those forecasts on Wednesday, although they warned that spooked public sentiment could have an outsized impact on investor behaviour in the short term.
The nation’s largest lender, the Commonwealth Bank, estimated house prices would be almost 3 per cent lower than otherwise in coming years. On an average house, that’s a $20,000 fall, spread out over more than three years.
“There is also a risk that house prices respond more sharply in the short term due to shifts in sentiment,” said senior economist Trent Saunders. “If that occurs, price growth could slow by more than implied by fundamentals alone over the coming year.”
It said the impact on rents would be “very small” and overall housing supply could increase, given the government’s $2 billion infrastructure program for councils and utilities’ operations.
Grattan Institute senior associate Matt Bowes said Treasury’s estimates were also in line with his modelling, which predicts property price growth slowing by 2 per cent and a $1 per week increase in median rents.
“In general, the biggest drivers of property market growth will continue to be things like the interest rate and the availability of homes on the rental market,” he said.
Westpac economists also argued that the most important short-term factor facing the property market was interest rate settings, while e61 research manager Nick Garvin said investors in existing properties would still be able to deduct their rental losses against eventual capital gains, which could be favourable.
“There could potentially be a market overreaction in the short term,” he said.
“In the aggregate, it is likely to weaken investor demand to some extent, it just may not be as big as what people were thinking.”
The changes are expected to push investors to tip money into properties with higher yields, which more recently has been high-density apartment stock rather than low-density housing.
RSM Australia’s real estate expert Adam Crowley described the package as the most significant restructuring of property tax in a decade, and said it should increase incentives for investors to build new stock.
“Off-the-plan apartments, supply-additive duplex and townhouse developments, and build-to-rent product are now structurally favoured by the tax system in a way they have not previously been,” he said.
Macquarie analysts warned the changes would also reduce the maximum amount banks lend to property investors by 10 to 20 per cent, however, resulting in slower house price growth.
“While the impact on the housing market remains uncertain, among rate hikes, a slowing economy, and now tax changes, we see downside risk to house prices,” the Macquarie analysts said.
But the property sector sounded severe warnings over the reforms, with the Finance Brokers Association of Australia arguing that if house prices or rental costs surge, the government should abandon the changes.
“It is not obvious at this time how a reduced supply of rental properties coupled with increasing demand due to factors, including population growth, can do anything except drive up rental prices for many who are already struggling,” said its interim chief executive officer Peter White.
The Housing Industry Association warned the package would reduce the overall level of residential investment, even if it increased the attractiveness of building a new home.
“Established investors, institutional investors, self-managed super funds and those with large housing portfolios … have alternative incomes to offset,” association chief economist Tim Reardon said.
“It is possible that ‘mum and dad’ investors might access other corporate structures to avoid this additional tax.”
The Real Estate Buyers Agent Association said potential investors had been delaying purchase decisions because of the pre-budget uncertainty over property tax settings.
“If these changes discourage investment, fewer rental homes will be added to the market, and that will push rents higher. Tenants will feel the impact long before the broader market adjusts,” association president Melinda Jennison said. “It really is that simple.”
Other elements of the housing sector backed the changes, with the Australian Forest Products Association – whose members supply timber for construction – saying they would drive investment and improve housing affordability.
The reforms did have an impact on the nation’s big banks, which account for more than three-quarters of all home lending.
Shares in the Commonwealth, which reported softer-than-expected quarterly results, fell by more than 10 per cent, or $30 billion, on Wednesday. Westpac, the second-largest lender, suffered a 3.9 per cent drop, NAB slipped 1.9 per cent, and ANZ lost 2.5 per cent.
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Shane Wright is a senior economics correspondent for The Sydney Morning Herald and The Age.Connect via X or email.
Natassia Chrysanthos is Federal Political Correspondent. She has previously reported on immigration, health, social issues and the NDIS from Parliament House in Canberra.Connect via X or email.From our partners
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