Negative gearing and CGT reforms forecast to reduce established dwelling prices by up to 3%
Analysis by Commonwealth Bank of Australia (CBA) has found that federal Budget changes to negative gearing and capital gains tax (CGT) are likely to reduce established dwelling prices by close to 3% relative to what they would otherwise have been, with the impact concentrated in apartment and lower-priced segments where investor activity is highest.
The Budget restricts negative gearing for residential property to new builds from 1 July 2027 and replaces the existing 50% CGT discount with cost-base indexation and a 30% minimum tax rate for investors.
The removal of negative gearing for established dwellings increases the annual after-tax cost of holding such properties. The effect is most pronounced for investors with high marginal tax rates, high leverage, low rental yields and high interest expenses. CBA estimates the change is equivalent to roughly a 90 to 155 basis point increase in investor mortgage rates in immediate cash-flow terms.
However, the Budget design allows quarantined losses to be carried forward and offset against future residential rental income or property capital gains, which reduces — though does not eliminate — the immediate impact on investor returns.
On the CGT side, the effect depends on the relationship between inflation and price growth. Where annual house price growth exceeds approximately 4.5 to 5%, the new indexation regime is less favourable than the previous 50% discount. Below that threshold, indexation can be more generous. CBA's analysis, using a holding period of 10 years, indicates indexation becomes equivalent to the previous discount at annual price growth of around 4.8%.
Investors purchasing new dwellings will be permitted to choose between the 50% CGT discount and the new indexation treatment at the point of sale, creating a further incentive to buy new builds over established stock.
"The combined effect reduces the attractiveness of established dwellings as investment assets, though there are some offsets that limit the overall effect on prices," said Trent Saunders (pictured right), senior economist at Commonwealth Bank of Australia.
"Notably, the ability to quarantine losses reduces some of the potential downside effects of the negative gearing change"
Established dwelling prices set to fall gradually
Using a modified version of the Reserve Bank of Australia's Saunders-Tulip housing model, CBA estimates the combined policy changes will see house prices settle just under 3% below where they would otherwise have been. Without the quarantining of losses provision, the modelled decline was approximately 5%.
The price effect is expected to be gradual, with prices roughly 2% below baseline after three years and peak annual drag on price growth of around one percentage point. Apartments, townhouses and lower-priced established dwellings are likely to bear the greatest impact.
CBA notes the downside scenario, in which quarantining provides less offset and CGT indexation has a larger dampening effect on demand, could see prices around 5.5% below baseline. There is also a risk of a sharper near-term reaction driven by shifts in sentiment.
Rent rises negligible; construction expected to hold steady
The impact on rents is expected to be minimal. Treasury estimates rents could rise by around $2 per week for a household paying the current median rent, which CBA describes as broadly consistent with its own modelling. The overall effect on housing supply is expected to be small and potentially positive, given that negative gearing is retained for new builds.
Construction activity is expected to be neutral to slightly positive on balance. Retaining negative gearing for new dwellings should redirect some investor demand toward new builds, particularly in the apartment sector where investor pre-sales underpin project viability. The budget's $2 billion Local Infrastructure Fund is intended to support enabling infrastructure for new housing.
Offsetting factors include the broader reduction in investor appetite resulting from the CGT changes, weaker expected capital gains and elevated construction costs.
CBA notes that ongoing Middle East conflict has pushed up input costs, including fuel, plastics and some plumbing materials, which may reduce project feasibility and complicate pre-sales.
Lower turnover may limit affordability gains for first-home buyers
Housing turnover is expected to fall, at least in the near term. Grandfathered investors — those holding established properties acquired prior to the announcement — have an incentive to retain them to preserve access to the prior tax treatment, reducing listings. This lock-in effect may partially cushion prices but will also reduce market liquidity.
For first-home buyers, the reforms should lessen investor competition in the established market. However, CBA cautions that the benefit may be diluted by lower turnover and the migration of investor demand toward new builds, both of which limit the number of established properties coming to market.
Updated dwelling price forecasts
CBA has revised its dwelling price growth forecasts, incorporating the policy changes alongside three cash rate increases already delivered this year and a more uncertain global environment.
Dwelling price growth is now expected to be 3% over the year to December 2026, down from a prior forecast of 5%. The forecast for growth over the year to December 2027 remains at 3%.
The 2026 downgrade reflects primarily the impact of higher mortgage rates, which CBA estimates subtract 1.5 percentage points from price growth. The policy changes are estimated to subtract a further 0.6 percentage points from 2026 growth, rising to just under one percentage point through 2027. Easing population growth is expected to subtract an additional 0.8 percentage points from the 2027 forecast.
"While fundamentals suggest that the impact of the housing policy changes on prices should be small, a key risk is that there is a larger short‑term response of house prices due to the effect of these policy changes on sentiment," Saunders said. "If this occurred, price growth could ease by more than we expect based on fundamentals alone over the coming year."
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