Who really wins and loses in the new housing shake-up – will everyday investors, renters, and first home buyers come ahead or end up worse off? Here is what the budget means for you.

Despite election promises not to reform the tax system, Treasurer Jim Chalmers handed his fifth budget, targeting capital gains tax (CGT) discount and negative gearing, putting an end to months of speculation.

“We choose the hard road of reform, not the path of least resistance,” Chalmers said.

Under the new reforms, the government will replace the flat 50 per cent capital gains tax discount with an inflation-indexed system and introduce a minimum 30 per cent tax on capital gains, with changes applied prospectively from 1 July 2027.

Assets bought before the transition will temporarily keep the 50 per cent discount, while new builds remain exempt and continue to receive the current concession to support housing supply.

Similarly, negative gearing will be limited to new dwellings to boost housing supply and improve access for first home buyers, while investors purchasing existing properties can no longer offset losses against other income.

Current investors are grandfathered under the old rules, and new builds will continue to allow full negative gearing benefits.

Chalmers said the budget was delivering a fairer tax system for workers, first home buyers, and future generations.

“This will help rebalance a system which is more generous to assets than it is to labour,” Chalmers said.

“And help rebalance a system where house prices have decoupled from incomes.”

However, industry players said the budget will instead create a two-tier property market, shut out younger rent-vestors, raise rental prices, and fail to boost supply as anticipated.

A two-tier market and a lack of confidence

While the budget aimed to create a “fairer” path to home ownership, Real Estate Buyers Agent Association of Australia (REBAA) president, Melinda Jennison, said it instead split the market.

She said that buyers were now falling into two groups: those who rushed to buy before budget night and those who held back, awaiting the changes.

“Over the past few weeks, we’ve seen some buyers wanting to purchase quickly, and others have paused, waiting for certainty,” Jennison said.

“That divergence has now crystallised, and the federal budget has confirmed the direction many investors feared.”

She said the changes had already influenced behaviour, with many buyers reassessing how and when they invest, with buyers looking to purchase the most “tax-effective way”.

Similarly, LJ Hooker head of research, Mathew Tiller, said the market was already showing mixed signals, with conditions softer than a year earlier and borrowing constrained by higher interest rates, prompting buyers to be more selective.

“The evidence suggests tax reforms are unlikely to deliver a significant reduction in house prices – the bigger impact is likely to be on investor confidence and future investor activity,” Tiller said.

“We are not saying housing tax settings should never change, but timing matters given Australia remains undersupplied, and vacancy rates are already tight.”

Herron Todd White chief economist Cameron Kusher said that investing in property had “just become a lot more challenging”.

He said that scrapping negative gearing and revising the capital gains tax discount would significantly reduce the appeal of investing in property and other assets.

“If investors are looking for low tax capital gains in property, they are probably going to be focusing now on major renovations to principal places of residence or upgrading their principal place of residence to those in more sought-after locations,” Kusher said.

The end of the new rentvestors generation

According to the Property Investment Professionals of Australia (PIPA) chair, Cate Bakos, young Australians will be the biggest losers of the CGT changes as it becomes a hurdle to rentvesting.

“For many young people, the long-term plan is to sell their investment and use the equity to buy their first home,” she said.

“With the CGT discount reduced, the tax bill they face becomes significantly larger, which is a direct penalty on the very cohort the government claims to be helping into home ownership.”

She said policymakers needed to recognise that rentvesting had become one of the only viable entry points for many younger Australians priced out of buying where they live.

Additionally, she warned that higher CGT would undermine its viability and remove one of the few pathways to home ownership.

“Serviceability will also be significantly impacted, given younger investors will not be able to offset losses until the asset is sold or it is positively geared, which generally takes up to a decade of ownership.”

Similarly, Real Estate Institute of Queensland (REIQ) CEO Antonia Mercorella said that future investors and “mum and dad” will be the ones suffering the most from the reforms.

“Today’s aspiring home owners may also be impacted in the future. Should they wish to invest in established property, they will not have the benefit of negative gearing like others before them have enjoyed for decades,” Mercorella said.

She said the changes would also widen the gap between “mum and dad” investors and institutional players.

She said that, as most tax exemptions apply only to new builds, institutional investors can afford to buy new and do so through generous build-to-rent scheme incentives and sophisticated financial structures.

“Meanwhile, future mum and dad investors are being disadvantaged, which is concerning given private investors are heavily relied upon by the government and the community when it comes to housing our rental population,” Mercorella said.

First home buyers

According to the government, changes to negative gearing and the capital gains tax discount should help an extra 75,000 first home buyers enter the property market over the next decade.

Data showed that over the last 10 years, an average of 115,014 first home buyers have entered the market, or 6.5 per cent of new owners each year.

According to PRD chief economist Dr Diaswati Mardiasmo, while first home buyers are touted as the winners of this budget, based on the above assumption, it can’t be guaranteed, as property prices are unlikely to go down enough to be affordable.

She also noted that the expanded 5 per cent first home buyer scheme would likely lift demand, prices, and debt.

“The logic behind how these tax reforms will help is through less competition from investors in the established market, and the possibility of investors selling their property before 1st July 2027 to fully use the 50 per cent CGT discount,” Mardiasmo said.

“There is validity in that reasoning, yes, but it’s also a bit of a gamble – because it’s reliant upon the actions of another demographic who are also looking for a home and to capitalise on equity, add on wealth; i.e., investors and owner occupiers.”

Despite the budget being directed to first home buyers, CPA Australia tax lead Jenny Wong said that the changes will narrow further pathways to financial independence, as many already find building wealth challenging.

“Increasingly, they are being pushed towards one pathway – earning a salary, buying a home if they can, and relying on super for retirement. That’s a pretty narrow definition of opportunity for Australians,” Wong said.

“Younger Australians want options to create wealth – not just from wages. What is there in these reforms that helps young people create a future in our country?”

She said that while intergenerational equity matters, the proposed changes would not achieve it and could worsen it, noting that it is shaped by more than tax policy alone, with deficits and rising government debt also placing a burden on future generations.

Renters to suffer

Mardisasmo said that, as existing negative gearing arrangements will be grandfathered, the current rental market won’t be immediately disrupted by a massive sell-off.

Yet, Jennison said that as rules shift, buyers naturally rethink their strategy, especially those making long-term investment decisions, and in time reduce investors’ participation in the rental market.

Additionally, industry leaders have warned that the new reforms could drive rents up by as much as 30 per cent due to reduced supply, fewer rental listings, and landlords passing on higher costs.

“When investors step back, rental supply shrinks – it really is that simple,” Jennison said.

“If these changes discourage investment, fewer rental homes will be added to the market, and that will push rents higher. Tenants will feel the impact long before the broader market adjusts.”

Supply

While the Budget aimed to boost home ownership through tax reform, it acknowledged that taxing established homes, while exempting new builds, could reduce the new housing supply by 35,000 over the next decade.

Housing Industry Association (HIA) chief economist, Tim Reardon, said that while restricting negative gearing to new homes may seem like it would boost supply, that assumption only holds in a simplified market where investors are choosing solely between new and established properties.

“In the real world, capital is mobile. Investors aren’t making the decision to invest in new or established homes. They can also redirect investment to industrial property, commercial property, shares, or other assets,” Reardon said.

“Taxing established homes more will likely lead to less investment in housing, and therefore less investment in new home building. This will worsen the supply problem.”

According to Australian Bureau of Statistics (ABS) data, investors have been responsible for building 43 per cent of new homes in Australia over the past year.

“Investors are playing an increasingly important role in the housing market as the rise in the regulatory and tax imposts on new homes continues to make the cost of building a new home out of reach of first home buyers, especially in key markets of Sydney, Melbourne, and Brisbane.”

“We cannot tax our way to increased housing supply,” he concluded.

This article was first published on Smart Property Investment, a sister-brand of Property Buzz.