Negative gearing changes won't kill property investment, but could worsen rental crisis

With changes of government, it is not unusual to see changes of policy. That is always likely to occur during the life of any investment - whether that be real estate, shares, cryptocurrency or otherwise.

For medium to long-term investors, what is important is not to become rattled by policy changes, but instead to look at how to pivot and, most importantly, how to take advantage of any changes in policy.

At such times, all investors should of course turn to their legal and accounting adviser, however, the May 2026 Federal Budget should not create any serious deviation from the theory that real estate is one of the safest and strongest long-term investment vehicles moving forward.

In relation to the changes to negative gearing, those who owned negatively geared properties as at Budget night will see absolutely no change to their position due to the grandfathering provisions applying to existing arrangements.

For purchases made after the Budget was delivered, the biggest impact is really one of cash flow convenience. The ability to claim expenses still exists, however, those losses can no longer be offset annually against other forms of income.

Instead, those losses must either be carried forward into future years, be offset against other rental income, or ultimately be claimed against the capital gain upon sale of the property.

It should also be remembered that most negatively geared properties become positively geared within approximately five years.

Rental market could tighten further

For many investors, the changes will represent more of an inconvenience than a disaster. For some, however, it may mean purchases need to be structured differently, most likely through larger deposits and lower borrowing levels.

Ironically, that may reduce the price point investors can afford, which appears somewhat inconsistent with the Government’s broader objective of directing investors towards new housing stock.

The reality is that many investors simply cannot afford brand new developments at current construction prices. As a result, many are likely to move towards lower-priced resale properties instead, directly competing with first home buyers, which arguably defeats part of the stated intention behind the policy changes.

That may prove to be one of the unintended consequences of the reforms.

For those who can afford to buy new builds, negative gearing remains fully available in its current form.

For those of us who were active in the real estate industry during the 1985 removal of negative gearing, we remember very clearly how quickly rental supply started to decline.

As new investors stopped buying and established investors gradually sold properties through normal life events such as deaths, divorces and financial pressures, the rental pool shrank rapidly.

The result was a severe shortage of rental accommodation and sharply rising rents.

Without the benefit of negative gearing, investors needed to increase rents simply to help cover the holding costs of their investments.

Ultimately, the government of the day reinstated negative gearing within two years after seeing the negative consequences its removal had created for the rental market.

There is every possibility we may see similar pressures emerge again.

Capital gains tax rules

In relation to capital gains tax, it is important to remember that capital gains tax applies to all forms of investment, whether shares, businesses or real estate. It is simply a tax on profit.

For most investors, the tax only becomes payable when the asset is sold. Therefore, for many existing property owners, there is effectively no immediate impact unless they choose to sell their property.

In fact, these changes may encourage more investors to retain their properties, something the rental market desperately needs.

For assets owned prior to September 1985, there remains no capital gains tax payable. For properties held before 1 July 2027, any future capital gains calculations will generally only apply to growth beyond that date, indexed in accordance with CPI provisions. For new purchasers entering the market today, the new rules similarly do not begin applying until 1 July 2027.

Property investment choices

Naturally, there will be considerable public reaction and uncertainty as these changes unfold. But once markets settle, the core question for Australians remains unchanged: “How do I best invest my hard-earned money moving forward?”

For some, the loss of annual negative gearing deductions will be inconvenient. For others, it may reduce the size or structure of their initial investment.

Most investors are unlikely to simply leave their savings sitting in term deposits indefinitely. People will still seek better-performing assets, whether through shares or real estate.

That simply means investors will need to work more closely with advisers to determine the most effective structure moving forward.

Real estate will remain attractive because it provides two key benefits: long-term capital growth and annual rental income, which generally rises over time. The only guaranteed way to avoid paying capital gains tax is to avoid making a profit altogether, which makes little financial sense.

So yes, the landscape has changed. But that should not deter people from making sound long-term investment decisions.

Policies can always change

It is also worth remembering that governments change and policies change with them.

At some point in the future, governments may well be forced to revisit these settings if the reduction in investor activity further worsens Australia’s housing shortage.

One thing is already critically clear: Australia is simply not building enough rental accommodation.

Without strong investor participation, we are likely to see higher rental prices, tighter vacancy rates and increasing levels of homelessness. Importantly, Australia was already experiencing a rental crisis before these policy changes were introduced.

As a result, we may see the consequences of these reforms emerge far more quickly than many expect.