Investors disincentivised from buying and investors disincentivised from selling – the budget reforms on the Capital Gains Tax (CGT) discount and negative gearing could create a catch 22 in market activity, property experts say.
The new rules restrict negative gearing for residential property to new builds from July 1, 2027. After that, rental losses on existing residential investment properties bought after budget night will be quarantined, so can only be offset against other residential property income.
The 50 per cent CGT discount would be replaced with inflation-adjusted indexation to restore the taxation of real gains, with the base tax rate set at 30 per cent.
The big switches will be grandfathered for existing investments, and new builds will keep the option to use the 50 per cent discount to help boost supply.
![Chalmers](data:image/svg+xml,%3Csvg xmlns="http://www.w3.org/2000/svg" viewBox="0 0 800 450"%3E%3C/svg%3E)
Federal Treasurer Jim Chalmers has made sweeping changes to Australia’s property tax system. Picture: Lyndon Mechielsen/Courier Mail
THE NEVER SELL INVESTORS
While there may be some pull back in activity over the next six months while investors work out what the changes mean for them, it won’t solve Australia’s chronic supply/demand imbalance, says founder of Melbourne-based Mecca Property Group Abdullah Nouh.
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“By the time the election comes back around I think property prices will be a lot more expensive than they are today,” Nouh says.
National listings are below the five-year average, according to Cotality data from March, he says.
Melbourne buyers agent Abdullah Nouh, founder of Mecca Property Group.
The changes to negative gearing could also lead to the rise of “the never-sell investor” – those investors who hold onto their existing properties because their tax benefits are grandfathered.
“I’m not going to be selling it down to forego my negative gearing benefit just to buy another residential asset,” Nouh says about his property portfolio. “A lot of investors out there that already own property, probably will hold on to their investments.
“What that means is you’re going to have even less stock out there in the market.”
ADJUSTING TO THE NEW LANDSCAPE
Sydney buyers agent from Aus Property Professionals Lloyd Edge says he also expects investor activity to soften over the short term.
Buyers’ agent Lloyd Edge.
“The biggest behavioural shift will be that investors become much more selective,” he says. “Investors will need to look much more closely at cash flow, rental demand, vacancy rates, holding costs and the realistic growth outlook.
“We are also likely to see capital shift toward new builds because they retain more favourable tax treatment.
“But investors need to be very careful not to buy purely for the tax benefit. New does not automatically mean investment grade.”
While the changes may have been put in place to disincentivise investors and lessen the competition for homebuyers, Edge says serious investors won’t be fleeing the market.
There will likely be a big shift in interest to new developments.
“Serious investors will not disappear; they will adjust,” he says. “The people most likely to step back are speculative investors or smaller mum-and-dad investors who were already nervous about interest rates, serviceability and holding costs.”
CEO of Rethink Group Scott O’Neill says residential property will likely become less attractive to investors looking for “sophisticated capital” with higher net worth investors already moving towards other asset classes “that are not in the political crosshairs”, such as commercial property.
He says this will create a two speed market over the short term where prices soften in investor-dominated markets where there is established housing while new developments experience a tailwind due to tax-incentives.
Rethink Group CEO Scott O’Neill.
Over the long term, the losers from this two-tier economy will be residential investors with “large negatively geared portfolios built on the assumption that the tax treatment would remain stable” who will likely “see their returns compress and their exit economics change.”
“Mum and dad investors who entered the market in the last five years with thin margins will feel this most acutely,” he says.
Renters will also feel the brunt of less rental stock coming on the market with new builds not likely to keep pace, he added.
The changes could great a divide between existing investors and new ones. Picture: Josie Hayden
INVESTING OPPORTUNITIES
While lending may prove an issue for investors who used to benefit from negative gearing being used to increase their serviceability, it’s worth noting that investors will still be able to carry their excess property losses forward to offset residential property income in future years, Nouh says.
He says the short term could prove an excellent buying window while many investors assess their situation. Opportunities include dual income set ups and properties where you can build an extra dwelling to boost cashflow.
O’Neill says commercial property offers a good opportunity for established investors.
Property selection will be even more crucial following the changes. Picture: Jake Nowakowski
“Industrial assets, essential retail anchored by supermarkets and medical services, and medical assets with long government leases offer yields and income security that residential property simply cannot compete with on a risk adjusted basis,” he says, adding New Zealand commercial is another option to consider, as is the build-to-rent and co-living space.
“For investors who want to stay in Australian residential property, the opportunity will be in markets and segments where genuine undersupply persists regardless of policy changes,” he says. “Queensland, Western Australia, and South Australia all have structural demand drivers that will continue to support values even in a less investor friendly tax environment.”
Edge says the best opportunities are in properties that offer more than one outcome.
Commercial investing presents an option for seasoned investors. Picture: Evan Morgan
“Investors should be looking for assets that have strong rental demand, sustainable cash flow, growth drivers and the potential to create equity,” he says.
And in good news for first-time buyers, rentvesting remains a viable option for those who can’t afford to buy where they live – as long as the numbers stack up, he says.
“A good rentvesting strategy after these changes will be about buying an asset that has genuine long-term demand, strong rental appeal and a realistic path to growth or equity creation,” he says. “That could be a well-selected new build, a dual-income property, a townhouse in a growth corridor, or an established property where the cash flow still makes sense without relying heavily on tax offsets.”
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