On 12 May 2026, Treasurer Jim Chalmers delivered what he called “the most significant tax reform package in more than a quarter of a century.” The federal budget abolished negative gearing for established residential properties bought after 7:30pm that evening and replaced the 50% capital gains tax discount with cost-base indexation from July 2027.
Five months later, Sydney has shed $48,000 in median value since January. Auction clearance rates have collapsed below 50%. One in six investors sold at least one property in the past year, before most of the changes have even taken effect. This isn’t a routine cooling. It’s a structural turning point in who owns Australian property and what it costs.
The Budget That Changed Everything
From 1 July 2027, anyone buying an established residential investment property can no longer deduct rental losses against salary or wages. Those losses can only offset other residential rental income or future capital gains. The 50% CGT discount, a Howard-era policy from 1999, is replaced by cost-base indexation, meaning investors are only taxed on gains above inflation, with a 30% minimum tax on capital gains.
Existing property owners are grandfathered: they can continue negatively gearing indefinitely and keep the 50% CGT discount on gains accrued up to July 2027. New builds are fully exempt, preserving incentives for construction that genuinely adds to housing supply. The changes are expected to raise approximately $3.6 billion over four years, and with the Greens backing the package, passage is “almost certain.”
The Investor Exodus Accelerates
The PIPA 2025 Annual Investor Sentiment Survey found 16.7% of investors sold at least one property in the past 12 months, up from 14.1% in 2024 and 12.1% in 2023. Of those sold properties, only 42% were bought by other investors and stayed in the rental pool; 37% went to owner-occupiers and 25% to first-home buyers.
PIPA Chair Lachlan Vidler didn’t mince words: “This shift is structural, not temporary. Once a property leaves the rental market, it rarely returns. We’re watching the slow dismantling of Australia’s rental supply.” Queensland investors led exits (35.5%), followed by Victoria (30%), where rising land tax, vacancy levies, and tenancy reforms have created what Vidler calls “a climate of uncertainty.” Some 53% of surveyed investors said they would exit if negative gearing changes were introduced, and 35% said they would sell if the CGT discount were reduced to 25%.
A Market in Freefall
The current downturn follows an extraordinary run: 2025 saw national home prices rise 8.8%, the strongest calendar year since 2021, and total residential dwelling value surpassed $12 trillion for the first time. Regional markets outperformed capitals (up 9.7% versus 8.2%), with regional WA surging 16.1%.
That momentum has now reversed. Three RBA rate hikes since February 2026 took the cash rate to 4.35%, and the tax changes accelerated the downturn. Cotality’s national Home Value Index fell 0.4% in June, the largest monthly drop since December 2022. Sydney dropped 1.2% in June, Melbourne 1.0%. Four capitals are falling: Sydney, Melbourne, Canberra, and Adelaide, which slid in late June after 15 consecutive monthly rises. 123 suburbs recorded value falls of 5% or more year-to-date, led by Malabar in Sydney (-12.3%) and Deepdene in Melbourne (-11.3%).
Cotality’s Research Director Tim Lawless cited “property taxation changes” alongside higher interest rates and reduced borrowing capacity as key factors weighing on the market. Auction clearance rates have been below 50% since late May, dipping to the low 40s. Nearly 20% of scheduled auctions were withdrawn (almost double the rate a year earlier), and 40% of vendors signed before auction day. National median days on market stretched to 42 days in June, up from 27 in November 2025. Cotality’s Gerard Burg said: “I think the reality is we are now in a property downturn that is set to continue at least for the next six months or so.” HSBC’s Paul Bloxham called it “just the beginning.”
Winners and Losers
Treasury projects an additional 75,000 Australians will enter home ownership over the next decade. House price growth is expected to run roughly 2 percentage points slower than otherwise for a couple of years, moderating prices by approximately $19,000. At auctions, investors now weigh whether a property still works without future negative gearing or the 50% CGT discount, reducing their willingness to outbid first-home buyers.
Existing investors are largely protected. Grandfathering means those who owned before budget night can continue negatively gearing indefinitely. As the Guardian noted, wealthier, older cohorts have now “locked in their advantage.” Treasury expects benefits to wash out over roughly a decade: about half of negatively geared properties are sold or generate income within four to five years, and more than 75% within ten.
Some analysts argue the reform is as much about fiscal sustainability as housing affordability. The old-age dependency ratio, projected to climb from 26.9% to 38.7% over the next 40 years, means a shrinking working-age population will support a growing retired cohort. Tax concessions that disproportionately benefit older, wealthier investors become harder to justify in that context.
For renters, the picture is contested. Treasury models an impact of just $2 per week; JP Morgan’s Tom Kennedy describes scrapping negative gearing as “neutral to slightly supportive of rents.” PIPA counters that only 42% of sold properties stayed in the rental pool. The 1985-87 precedent, when negative gearing was briefly removed, produced evidence that was “mixed and ultimately inconclusive.”
New build investors retain full access to both negative gearing and the 50% CGT discount, and commercial property appears entirely unaffected, making both attractive destinations for capital leaving established residential property.
What Happens Next
Domain’s FY27 forecasts point to Sydney house prices falling 3% to 7%, Melbourne 4% to 8%. Brisbane, Adelaide, and Perth still show growth but are decelerating, what Domain’s Nicola Powell calls a market “no longer moving in lock-step.” Domain assumes the cash rate has peaked at 4.35%, with a cut arriving in the second quarter of 2027, though that outlook faces significant global uncertainty.
Supply remains the bottleneck. Treasury models 35,000 fewer homes built over ten years as investor demand contracts. Labor’s other housing investments add 65,000, netting 30,000, but construction faces labour shortages, rising costs, and competition from infrastructure projects. Net overseas migration is down 40% from post-COVID peaks; dwelling construction starts are up 25% year-on-year. These opposing forces complicate any straight-line forecast.
The RBA was caught off-guard by the rapid slowdown, and all four major banks have downgraded forecasts. CBA moved from roughly 7% growth for 2026/27 to 5% then 3%. Regional markets, which outperformed capitals throughout 2025, face their own questions as falling city prices and shifting investor behaviour ripple outward.
Conclusion
Three things are now clear. First, grandfathering means the full effects of these reforms will take roughly a decade to materialise, but the direction of travel is set: established residential property is no longer the tax-advantaged asset class it was for a generation. Second, new builds and commercial property have emerged as the clear destinations for investor capital seeking to retain tax benefits, which may redirect construction where it is most needed. Third, the supply shortfall remains the fundamental problem. Tax reform changes who buys existing homes, but only construction changes how many homes exist. For first-home buyers watching prices fall, for investors recalculating their portfolios, and for renters hoping prices ease without sacrificing supply, the market is being structurally reshaped rather than cyclically cooled. How each participant positions themselves will define the next decade of Australian property.
Frequently Asked Questions
How does the new negative gearing system work for properties bought after May 2026?
From 1 July 2027, investors in established residential properties purchased after 7:30pm on 12 May 2026 cannot deduct rental losses from salary or wages. Losses can only offset other residential rental income or be carried forward to offset future capital gains. New builds remain fully exempt. The budget-night cutoff was specifically designed to prevent a rush of purchases before the rules changed. (ABC News)
Are existing property investors affected by the negative gearing changes?
No: properties owned before 7:30pm on 12 May 2026 are grandfathered. Existing investors can continue negatively gearing against salary income indefinitely. For CGT, gains accrued up to July 2027 retain the 50% discount; future gains fall under the new indexation system and 30% minimum tax. Treasury expects these benefits to wash out over roughly a decade, as about half of negatively geared properties are sold or become positively geared within four to five years, and more than 75% within ten. (The Guardian)
What is cost-base indexation and how does it replace the 50% CGT discount?
From 1 July 2027, instead of automatically halving the taxable capital gain, the purchase price is adjusted upward by inflation over the holding period, so you are only taxed on the real gain above inflation. A 30% minimum tax on capital gains also applies. During periods of high inflation, indexation could produce a larger discount than 50%, but in normal conditions it will be smaller. New build investors can choose between the old 50% discount or indexation. (ABC News)
How much have house prices fallen in Sydney and Melbourne in 2026?
Sydney median dwelling values fell $48,000 between January and late June 2026 and are now just $3,000 above June 2025 levels. Sydney recorded -1.2% in June alone (the steepest monthly drop since August 2022) and -3.2% for the June quarter. Melbourne fell -1.0% in June, with its median $7,000 below June 2025 levels. Domain forecasts Sydney houses to fall 3% to 7% and Melbourne 4% to 8% across FY27. (The Guardian)
Why are investors selling their properties at record rates?
PIPA’s 2025 survey found 16.7% of investors sold at least one property in the past 12 months, up from 12.1% in 2023. Investors cited rising costs, legislative uncertainty, and fears over federal tax reforms. Some 53% said they would exit if negative gearing changes were introduced, and 35% would sell if the CGT discount were reduced to 25%. Victoria’s additional state-level measures (rising land tax, vacancy levies, and tenancy reforms) drove elevated exits at 30% of surveyed sales. PIPA Chair Lachlan Vidler described it as a “structural shift, not temporary.” (Financial Newswire)
Will rents go up because of the negative gearing changes?
Treasury modelling estimates the impact at roughly $2 per week for a household paying median rent, a figure contested by industry. JP Morgan’s Tom Kennedy described scrapping negative gearing as “neutral to slightly supportive of rents,” arguing grandfathering “materially blunts any near-term effect.” PIPA counters that every property leaving the rental pool permanently tightens supply. The historical precedent from 1985-87 produced evidence on rental inflation that was “mixed and ultimately inconclusive.” (The Guardian)
What counts as a new build under the new rules?
Eligible new builds must genuinely add to housing supply. This includes newly constructed apartments bought off-the-plan, duplexes built through knockdown-rebuilds that create net additional dwellings, construction on previously vacant land, and newly built properties occupied for less than 12 months before first sale. Excluded are: extensions adding bedrooms to existing homes, free-standing knockdown-rebuilds replacing one house with one house, granny flats beside existing properties, and new builds occupied more than 12 months before resale. (William Buck)
What is happening to auction clearance rates in 2026?
Auction clearance rates have been below 50% since late May 2026, dipping to the low 40s by late June, well below the 60%+ typical of a balanced market. Capital city sales volumes are estimated 16.2% lower than a year ago and 14.5% below the five-year average. Nearly 20% of scheduled auctions were withdrawn (up from 11.5% a year earlier), and 40% of vendors signed contracts before auction day. (Cotality)
How many first-home buyers will benefit from the tax changes?
Treasury modelling projects an additional 75,000 Australians will enter home ownership over the coming decade as properties shift from investors to owner-occupiers. At auctions, investors bidding against first-home buyers must now weigh whether a property still works without future negative gearing and the 50% CGT discount, reducing their willingness to outbid. HSBC’s Paul Bloxham cautions, however, that first-home buyers may be reluctant to “catch a falling knife” in a declining market. (The Guardian)
How do the RBA rate hikes affect the property market alongside the tax changes?
Three RBA rate hikes since February 2026 took the cash rate to 4.35%. Most analysts agree these are the primary driver of the current slowdown. CBA’s Trent Saunders attributes the cooling mainly to higher mortgage rates, with tax changes adding a structural layer on top. Cotality’s Tim Lawless cited “property taxation changes” as one of an “array of downside factors.” The RBA was “caught off-guard by the rapid slowdown” and held rates in June. The two forces (tighter monetary policy and tax reform) are compounding each other, creating conditions neither would produce alone. (REA)
Is now a good time to buy property in Australia?
It depends on your position. For first-home buyers with secure employment and a deposit, falling prices and reduced investor competition create genuine opportunity, but the risk of further declines is real. For investors in established property, the tax calculus has fundamentally shifted: without negative gearing against salary and with a reduced CGT benefit, many established properties no longer stack up. New builds remain fully tax-advantaged and may represent the clearest path forward for investors. (William Buck)
Which Australian cities are still seeing price growth in 2026?
While Sydney and Melbourne lead the downturn, Brisbane, Adelaide, and Perth continue to record growth, though at a decelerating pace. Domain’s FY27 forecasts show these three capitals in positive territory, with Perth benefiting from strong population growth and a tight supply pipeline. Regional markets are also outperforming: in 2025, regional dwelling values rose 9.7% versus 8.2% for the combined capitals, led by regional WA at 16.1%. The result is what Domain’s Nicola Powell calls a “multi-speed” market, where conditions diverge sharply by city and region rather than moving in lock-step. (ABC News)