How Proposed Changes to Negative Gearing Could Affect the Economy and First Home Buyers

Few policy levers in Australia provoke as much economic and political debate as negative gearing. The tax mechanism allows property investors to deduct rental losses against other income, effectively subsidising investment property ownership.

Now, with fresh signals from Canberra that reforms may be considered in the 2026 federal budget, the question has resurfaced: what happens to the economy, housing market, and first-home buyers if the rules change?

What Changes Are Being Discussed

Recent reports indicate Treasury is actively examining options to tighten investor tax concessions. Among the ideas under review:

• A potential limit allowing negative gearing on only two investment properties per individual

• Possible adjustments to the capital gains tax (CGT) discount, which currently allows investors to halve capital-gains tax on long-held assets

• Broader reforms designed to improve “intergenerational equality” and increase government revenue

The policy motivation is fiscal as well as housing-related. Negative gearing concessions are projected to cost the federal budget $7.9 billion in 2027 and up to $14.1 billion by 2035–36 .

Critically, more than one million Australians currently benefit, with roughly a third owning multiple properties .

Why Governments Consider Changing It

Three main policy drivers are shaping debate:

1. Housing affordability pressures

Economists and policy institutes widely argue investor demand has contributed to rising prices. Increased speculative buying pushes prices higher, making it harder for owner-occupiers to compete.

2. Budget repair

Reducing tax concessions could raise billions annually for government spending or housing programs.

3. Intergenerational equity

Critics argue the system disproportionately benefits older, wealthier investors and widens inequality.

Likely Effects on House Prices

Most modelling suggests reforms would not crash the housing market but could modestly soften prices.

• Grattan Institute modelling indicates prices could fall around 2 % if tax breaks were changed .

• Other estimates suggest reductions of up to 4 % depending on reform scope .

• Industry forecasts for Queensland show potential declines of up to 4 % with combined tax changes .

This suggests any price impact would likely be incremental rather than dramatic. Structural supply shortages still dominate price dynamics. Even the housing industry warns that if population growth exceeds construction, prices will rise “regardless of tax rates”.

Impact on First Home Buyers

This is where reforms could matter most.

Reduced investor competition

Investors currently account for about 38 % of housing finance . If tax incentives weaken, fewer investors may bid at auctions, making it easier for owner-occupiers to secure properties.

Higher ownership rates

NSW Treasury modelling suggests reforms could increase home-ownership rates from 67 % to 70 % long-term .

Academic research has gone further, estimating removal could push ownership to 72.2 % of households .

Investor sell-offs

Some investors might sell properties if deductions shrink, increasing housing supply available for purchase. Analysts say this could slightly lower prices while shifting stock from rentals to owner-occupiers.

Possible Downsides for Renters and the Economy

The policy is not without risks.

Rent increases

Research suggests removing negative gearing could:

• Reduce housing supply by about 1.8 %

• Increase rents around 2.5 %

Industry estimates point to weekly rent rises of about $21 in some scenarios .

Investment pullback

Negative gearing encourages investors to enter the housing market. Economists note it can increase housing supply by making projects viable that otherwise wouldn’t proceed .

If concessions shrink, fewer rental properties may be built or purchased.

Economic ripple effects

Housing investment is a major driver of:

• construction employment

• bank lending

• consumer spending via property wealth effects

A slowdown in investor activity could dampen those sectors, at least temporarily.

Who Would Be Hit Hardest

Policy discussion is increasingly focused on multi-property investors, rather than small landlords.

• About 85,000 investors own more than four properties .

• Critics argue tax incentives encourage aggressive portfolio building, sometimes driving price surges in regional markets .

Limiting deductions to a small number of properties would target this group while leaving most investors unaffected.

Competing Economic Philosophies

The debate reflects two competing schools of thought.

Reform advocates argue:

• tax concessions inflate prices

• investors crowd out first buyers

• the budget loses billions

• inequality widens

Opponents argue:

• housing shortages — not tax rules — drive prices

• removing incentives reduces supply

• rents will rise

• investment capital will shift elsewhere

These positions are not purely ideological; they are rooted in different assumptions about what primarily drives housing affordability: demand incentives or supply constraints.

The Political Reality

Despite repeated denials in past years, the fact Treasury is reviewing options suggests reforms remain on the policy radar. The government faces a balancing act:

• fiscal pressure to raise revenue

• public pressure to improve affordability

• political risk of upsetting investors

The outcome may not be radical change but targeted adjustments, such as caps on property numbers or CGT tweaks.

Strategic Economic Assessment

If reforms proceed in moderate form (caps rather than abolition), the most probable macro outcome is:

In other words, redistribution rather than disruption.

Final Analysis

Negative gearing reform is often framed as a binary choice — keep or abolish. In reality, the policy debate has shifted toward calibrated reform designed to:

• reduce speculative investment,

• improve first-buyer access,

• protect supply, and

• raise revenue.

The evidence suggests such changes would not dramatically reshape the housing market overnight. But over time, they could subtly shift ownership patterns away from investor concentration and toward owner-occupiers.

For first home buyers, that shift — even if small — could be the difference between winning and losing at auction.

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