Federal Budget makes most sweeping changes to property landscape in decades

Treasurer Jim Chalmers on Tuesday night (12 May) revealed to the Australian people its financial and social roadmap for the year ahead.

Among the biggest changes affecting the housing sector was a reduction of the capital gains tax discount from 50 per cent to 30 per cent.

The Government will also limit negative gearing for residential property to new builds, with immediate effect.

At a time when consumer confidence is plumbing 50-year lows and 42 per cent of Australians have less than $1,000 in savings, and more than half are living pay cheque to pay cheque, the Albanese Government’s Federal Budget needed to be as bold as they had proclaimed it would be.

Added to that is the fact housing prices have reached escape velocity for young people, 36 per cent of whom now regard home ownership as being out of reach in their lifetime.

The upshot is a 2026-27 Federal Budget that made an attempt at delivering what the government has framed as a pursuit of “intergenerational equity”.

Mr Chalmers said the measures aimed at slowing house price growth and eventually lead to lower rents.

At the centre of that map were property tax reforms that included a crackdown on capital gains tax discounts and negative gearing.

The government hopes the budget reforms will help 75,000 Australians buy their first home, according to their modelling.

The Federal Government’s Budget Paper No. 2 noted that: “From 1 July 2027, the 50 per cent CGT discount will be replaced by cost base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains.

“These changes will apply to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts and partnerships.

“Transitional arrangements will limit the impact on existing investments by ensuring the changes only apply to gains arising on or after 1 July 2027.

“The 50 per cent CGT discount will continue to apply to gains arising before 1 July 2027. Capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT.”

The negative gearing changes kick in immediately.

“From 1 July 2027, losses from established residential properties will only be deductible against rental income or the capital gains from residential properties,” the Budget Paper noted.

“Excess losses will be carried forward and able to be offset against residential property income in future years. These changes will apply to established residential properties acquired from 7:30PM (AEST) on 12 May 2026. Properties acquired prior to this time (including contracts entered into but not yet settled) will be exempt from the changes until disposed of.”

The government said eligible new builds will be exempt from the changes, “ensuring the benefits of negative gearing are directed to investment that increases the housing stock”.

Properties in widely held trusts and superannuation funds will be excluded, alongside targeted exemptions for build-to-rent developments and private investors supporting government housing programs.

These reforms are as significant as any seen in decades.

Previous attempts at proposing changes to negative gearing have proven political suicide but the latest changes were delivered with the surety of a party that holds a commanding two-party preferred poll lead.

According to the Roy Morgan survey released hours before the budget, the ruling ALP (53.5 per cent) is comfortably ahead of Liberal-National coalition (46.5 per cent).

Beyond housing, the government’s other major priorities in the budget were fuel security, cost of living, productivity, tax reforms and savings.

Balancing housing supply and tax reform

The changes to negative gearing and capital gains tax discounts have generated a range of responses.

They are all the more contentious for breaking pre-election pledges not to make those reforms.

Mr Chalmers said it was worth breaking a promise to voters if it was done for the “right and justifiable reasons”.

Some have touted that the changes will undermine the need for more housing supply and, by deterring property investors from buying or keeping properties, push rents upwards.

Other cite the example of Victoria, where relatively unfriendly tax measures for investors have contributed to property prices staying stable for years and therefore making home ownership a realistic ambition for first home buyers.

Real Estate Institute of Australia (REIA) President Jacob Caine said measures that directly support new housing supply, including the Government’s $2 billion infrastructure initiative, expected to enable around 65,000 additional homes, were positive and necessary steps toward addressing Australia’s housing shortage.

But he added that supply remains the biggest challenge facing the housing market.

“The only meaningful way to improve housing affordability is to get more homes built.”

Mr Caine said REIA remained deeply concerned about changes to current negative gearing and capital gains tax settings, with modelling by Qaive and Tulipwood indicating the reforms may result in around 25,500 fewer homes being built over the next five years.

“Australia is already well behind the National Housing Accord target of 1.2 million new homes, so we need policies that support investment and new housing supply, not policies that make delivery harder,” Mr Caine said.

“Private investment plays a critical role in Australia’s housing system. At a time of acute rental stress and chronic undersupply, policy settings should be encouraging more investment into housing, not creating uncertainty or reducing confidence.”

The introduction of changes that restrict negative gearing to new builds only comes with full grandfathering for existing investors, whereby those investors holding properties before the specified 2026 budget date can continue to use negative gearing until sale, protecting them from new policy restrictions.

CEO of National Shelter, Jackson Hills, was more supportive of the Treasurer's fifth budget, saying the tax changes build on important steps already taken by the Government, including the Housing Australia Future Fund and investments in enabling infrastructure to unlock new housing supply.

“Targeted reform to negative gearing and the CGT discount, is a measured and practical way forward.

“It respects existing investment decisions, avoids unnecessary market disruption, and starts to unwind tax settings that have long skewed housing outcomes, disproportionally impacting low-moderate households.

“This budget begins to rebalance the system back towards first home buyers, renters and the delivery of new homes that the country desperately needs.”

Inflation fight remains a government challenge

API Magazine asked Dr Susan Stone of Adelaide University’s School of Economics what the budget had done to address inflation and whether it could itself be viewed as being inflationary.

“The Treasurer will argue that the decreases in spending will help but spending next year actually goes up a bit until the tax changes kick in.

“So while it hasn't been an 'austerity' budget there isn't too much stimulus either.

Dr Stone asserted that the RBA would still have its work cut out taming inflation.

“The tax relief offered in the Budget is timed so as not to aggravate inflation, so that is helping, but to the extent that government spending continues to stimulate demand, that will work against the RBA.

“But from what I see, there are no large splashes of cash or spending.

“The most immediate issue is the price of energy and the anticipated flow-on effects we have yet to see that will do the most to keep inflation high.

“That trend actually helps government revenue, so therefore the best thing the government can do to fight inflation is not to spend any windfall gains.”

Give and take – other major policy announcements

Housing and property taxes were not the only major announcements in Tuesday’s budget papers.

More than 3 million Australian workers will be handed an up to $250 annual tax cut as part of cost of living measures. The annual tax offset for income earned from the 2027-28 income year will become a permanent feature but earners won’t see that until 2028.

The blowout in NDIS expenses that are now four times the amount expected is being reined in.

To trim from the $50 billion a year outlay, more than 160,000 participants will be forced off the NDIS and onto state-run support programs by 2030. That is projected to save the budget $37.8 billion.

In an increasingly uncertain world, defence spending will rise from 2.8 per cent to 3 per cent of GDP by 2033. An additional $53 billion will be spent on defence over the next decade.

The inescapable Middle East scenarios

Treasury modelling released alongside the Federal Budget warns a prolonged Middle East conflict could significantly worsen Australia’s inflation outlook, weaken economic growth and push unemployment higher.

Under the government’s severe-case scenario, oil prices could surge to as high as US$200 a barrel, driving inflation to around 7.25 per cent and lifting unemployment to 5 per cent, while economic growth turns negative.

Mr Chalmers said the government had factored the global instability into its Budget planning, acknowledging Australia faced “higher inflation and slower growth” if the conflict escalated further.

The government argues its response focuses on balancing targeted cost-of-living relief with fiscal restraint to avoid adding to inflationary pressure.

Treasury expects higher interest rates will continue weighing on household spending and demand, although the Budget also includes productivity, energy security and supply-side measures aimed at easing inflation pressures over the medium term.