Investors were already pulling back from the housing market ahead of Tuesday night’s budget, new data shows, as back-to-back rate hikes and rising inflation hits confidence and borrowing power.
A typical household has already seen their borrowing power fall by tens of thousands of dollars this year, and economists estimate tax reforms in the federal budget could hit investors’ cashflow by the equivalent of as many as six RBA rate hikes in one go.
One of the most significant reforms announced was the scrapping of negative gearing on residential property investments.
Newly built homes that add to housing supply are exempt from the changes, and investment properties purchased before budget night will be grandfathered.
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The government says its suite of housing reforms – which includes abolishing the 50% capital gains tax discount and replacing it with an inflation indexation model – will help 75,000 people buy their first home in the next decade.
New investors who are yet to purchase a property could now face a higher upfront cashflow burden, a move real estate agencies and industry groups say may cause many to reconsider housing as an investment.
The coalition has vowed to fight the tax changes and says it will undo any legislated changes if it wins the next election.
In his budget reply speech on Thursday evening, opposition leader Angus Taylor said the government was “pulling up the ladder of opportunity” for young Australians.
“Labor is locking out young Australians from the opportunities afforded to older Australians to build wealth and prosperity to get ahead,” Mr Taylor said.
Opposition leader Angus Taylor has vowed to overturn the government’s changes to negative gearing and the capital gains tax discount if elected. Picture: Getty
He also pledged to cap migration based on how many homes Australia builds.
“The number of people coming in far exceeds the number of houses built,” Mr Taylor said. “We must allow the housing market to catch up.”
Investor lending falls
Even before the budget was handed down, investors had already started retreating from the market.
Lending data released by the Australian Bureau of Statistics this week shows the number of new investor loans issued during the March quarter fell by 5.3% compared to December.
The data captures a turbulent three-month period, with two RBA interest rate hikes in February and March, and the onset of the Middle East conflict which has driven global fuel prices sharply higher.
Since then, a third rate hike has been delivered and inflation has jumped by an annual rate of 4.6% – well above the RBA’s 2-3% inflation target.
ABS head of finance statistics Mish Tan said lending had fallen across all borrower types, with the number of owner occupier loans down 6.2% during the quarter.
“Despite this quarter’s fall, lending activity remains at high levels, with total new home loans 8.6% higher than a year ago,” Ms Tan said.
Investors were particularly active last year, with the share of investor loans accounting for around 40% of all new home loans – the highest in a decade.
But that could be about to change.
Investor activity surged in 2025, but new lending data suggests momentum is pulling back. Picture: Getty
The combined impact of significant investor tax changes, a higher interest rate environment and global uncertainty could lead to a period of adjustment for borrowing activity, according to economists at Westpac.
“This is expected to see investor lending volumes moderate over time and progressively shift toward loans for construction and new dwelling purchases,” Westpac economist Neha Sharma said.
Despite the budget’s goal of adding to housing supply and improving prospects for first-home buyers, housing groups have warned the tax reforms could actually have the opposite effect.
“The government assumes investors will simply redirect their money into new homes, but housing investment doesn’t work like that,” Housing Industry Association chief economist Tim Reardon said.
Real estate groups warn policies that reduce investor activity overall will ultimately hit renters the hardest.
Industry groups warn renters could end up paying more if investors leave the property market. Picture: Getty
Ray White chief economist Nerida Conisbee said where rental homes are sold to owner occupiers, the rental pool shrinks.
“The argument for reducing investor demand often assumes a simple transfer: a renter buys a former rental property, becomes a first-home buyer, and the problem is solved. But the rental market does not work that way,” Ms Conisbee said.
“If a rental home becomes owner-occupied, that may help one household buy. But it also removes a dwelling from the rental pool, while new renters continue to arrive.
“These changes do not remove housing pressure – they risk shifting it from purchase prices into rents.”
New investors may face higher holding costs
Under the previous negative gearing rules, investors whose expenses exceed rental income, resulting in a loss, could deduct that loss from other income, such as wages.
CBA has calculated the potential dollar impact for investors purchasing a property without negative gearing. Picture: Getty
Modelling from CBA estimates scrapping negative gearing will substantially increase the upfront after-tax cost of holding an established investment property.
“Investors who acquire established dwellings after the announcement will no longer be able to immediately deduct net rental losses against their income,” CBA senior economist Trent Saunders said.
“We estimate this is equivalent to roughly a 90-155bp increase in investor mortgage rates in immediate cash-flow terms.”
Given a standard sized RBA interest rate rise is 25 basis points, that’s a hit of between three and six rate hikes in one go.
Analysis by the bank shows an investor purchasing an $800,000 established property could lose around $7,200 a year from their annual cashflow due to the removal of negative gearing. This assumes a marginal tax rate of 39% including the Medicare levy, i.e. a person earning between $135,001–$190,000.
“The effect is largest for investors with high marginal tax rates, high leverage, low rental yields and high interest expenses. That is, the investors most likely to have been negatively geared under the previous rules,” Mr Saunders said.
However, the lifetime cost “could be noticeably less” due to the ability to carry forward losses.
While negative gearing allows investors to offset losses against their taxable income in the year the loss occurred, carryover rules allow losses from rental income to be quarantined and carried forward so they can eventually be deducted once the property becomes positively geared.
“Some of the tax benefit may therefore still be realised later. This benefit is delayed, less valuable in present-value terms, and no longer helps investors fund annual holding costs,” he said.
“But it will undoubtedly reduce some of the effect of this policy change on broader housing market conditions.”
Home price forecasts revised lower
CBA expects national home prices will rise 3% in 2026, revised down from its previous forecast of 5% due to the combined impact of the budget changes, higher interest rates and rising construction costs.
Economists at AMP estimate the changes to negative gearing and the CGT discount alone could result in a “5% or so fall” in home prices in the short term as investors retreat due to a fall in the perceived after-tax return to property investment.
“This is likely to be compounded by the backdrop of RBA rate hikes. However, the dip is likely to prove temporary as the supply imbalance reasserts itself,” AMP chief economist Shane Oliver said.
National home prices fell 0.1% in April according to the PropTrack Home Price Index, marking the first monthly decline in 2026. However, property prices still remain 8.5% higher than a year ago adding around $92,200 to the value of the median home.
National home prices dipped in April, but the market is patchy. Picture: Getty
The monthly decline was driven by price falls in Sydney and Melbourne, with smaller capital cities like Perth, Brisbane and Adelaide continuing to power ahead.
Will Gosse, the chief executive of Sydney real estate agency BresicWhitney, said sentiment and consumer confidence are what move the fastest.
“The reforms to negative gearing and capital gains tax are the most significant shifts in property investment policy in a generation. And yet, the immediate material impact on existing investors is minimal,” Mr Gosse said.
“Current arrangements remain intact. It’s those looking to enter the market, or continue building portfolios as wealth-generating strategies, where the value proposition has shifted.”
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That could push more mum-and-dad investors towards commercial property assets in search of higher yields, some industry professionals say.
“It’s not clear how many investors will look to divest in the months ahead. What we can be sure of is that there will be continued opportunities for first-home buyers and owner-occupiers,” Mr Gosse said.
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