Would CGT and negative-gearing reform cool property prices?

Nobody really knows what the 2026 Budget's CGT and negative-gearing reforms would do to property prices, and the people claiming otherwise are usually selling a position. The serious modelling, from Grattan and the Parliamentary Budget Office and the RBA, lands in a narrow band of roughly 1 to 3% softening spread over a decade. The headlines suggesting a crash, and the industry rebuttals warning of a rental collapse, both sit well outside that band.

The price effect is the smaller half of the story. The compositional effect, who buys and who rents and where new supply lands, is materially larger and harder to model. A reader who fixes only on the price number is watching the wrong variable.

On 12 May 2026 the Treasurer announced changes to the Capital Gains Tax discount and to negative gearing for established dwellings, with a target effect date of 1 July 2027 and grandfathering for assets held before Budget night. The Coalition opposes the package. The legislation has not passed. What follows reads the public modelling and locates the proposals within it.

What the policy actually does

Two mechanical changes sit at the centre of the announcement. The first reduces the CGT discount that applies to investment property held for more than twelve months. The second restricts negative gearing on established dwellings, so that rental losses can no longer be deducted against unrelated wage income for properties acquired after the start date. Newly built dwellings are carved out of both measures.

Grandfathering is doing heavy lifting in the design. Anyone who already owns an investment property keeps the current treatment for that property indefinitely. The 1 July 2027 effect date is fourteen months after announcement, which gives investors a long window to bring purchases forward if they expect the rules to bind. The companion article on the CGT discount changes in the 2026 Budget unpacks the discount mechanics, and the piece on negative gearing grandfathering covers how the established-versus-new-build line is drawn.

The mechanism for price softening

Three channels run from the tax change to the auction clearance price.

• After-tax return. A smaller CGT discount raises the pre-tax capital growth an investor needs to clear a given after-tax hurdle. That shows up as a slightly lower bid at auction, because the same property now needs to be cheaper to deliver the same return.
• Tax-shield removal. Negative gearing lets a cash-negative investor write the shortfall against PAYG income, which materially improves the after-tax cash flow on a geared purchase. Restricting it for established stock pulls some marginal investors out of the bidding pool, particularly higher-income buyers with the largest marginal-rate benefit.
• Composition shift. Lower investor demand at the margin lifts the owner-occupier and first-home-buyer share of clearances. The replacement buyer pays a different price than the displaced investor would have, but usually not very different, because the same houses are still being sold to the same population of households needing somewhere to live.

The arithmetic of the first two channels is real but small. The third channel is the larger one, and the published modelling agrees on that ranking even where it disagrees on the magnitude.

What Grattan estimates

Grattan Institute has modelled negative-gearing and CGT reform across multiple papers, most recently in 2024, with Brendan Coates as the principal author. The headline Grattan number for full reform, abolition of negative gearing on established dwellings combined with the CGT discount cut to 25%, is a price softening of roughly 1 to 2% relative to the no-reform path, spread over a decade. The estimated rent effect is smaller still, with Grattan's read on the international and Australian evidence being that the supply response from removing the tax shield is modest.

The 2026 Budget proposals are partial relative to the full-reform scenario Grattan modelled. Grandfathering preserves the tax treatment of the existing investor stock. The new-build carve-out preserves investor demand at the construction margin, which is where the rental supply argument bites hardest. A partial reform produces a smaller price effect than a full reform, so the relevant Grattan-style estimate for the announced package is at the low end of the 1 to 2% range, and plausibly below it.

What the PBO has costed

The Parliamentary Budget Office has costed negative-gearing and CGT proposals across multiple iterations since 2016, for Labor, the Greens, and independents. The costings vary with the design but the shape is consistent: meaningful federal-revenue gain, most of it in the back half of the decade as more post-start-date investors cycle into the rule.

The PBO costing for the specific 12 May 2026 package was not in the public Budget papers as of this article. Past PBO costings of similar packages have run into the tens of billions of revenue gain across a ten-year forward estimate, weighted to the later years. The revenue number matters for the politics; it does not directly tell you the price effect, because the revenue-raising mechanism is the tax change on income, not a haircut on the asset value. Treat the eventual costing as a fiscal indicator, not a price model.

What the RBA has said

The RBA has not modelled the 2026 package in the public record. Its prior research, in Bulletin articles and Discussion Papers on the investor channel, has documented that the tax shield available to leveraged landlords contributes to investor demand at the margin and that investor activity is a meaningful share of recent-cycle credit growth. The Bank has stopped well short of attaching a number to the price effect of removing the shield, and its published commentary treats interest rates and migration as the larger cyclical drivers.

What the property industry says

REIA, SQM Research, and most industry economists argue the rental supply effect dominates any price effect. The case is that withdrawing the negative-gearing tax-shield from established stock reduces the after-tax cash flow on a held investment, which on the margin causes some investors to sell or to not buy, which shrinks the rental stock available to tenants. SQM Research's Louis Christopher has been the most prominent voice arguing that reform softens rents at the supply end before it softens prices at the demand end.

The argument has force but two caveats apply. The first is that the new-build carve-out preserves investor purchase incentives at the construction margin, which is the part of the pipeline that adds rental supply rather than recycling it. The second is that grandfathering keeps the existing investor pool in place; the supply effect runs only through new acquisitions, not through forced sales. Both design features cut against the strongest version of the rental-collapse case. Treat the rental side as a real concern with a smaller magnitude than the industry headlines tend to imply.

What probably will not happen

Four headlines worth cleaning off the table.

• "Negative gearing reform crashes the market."No serious model produces this. The full-reform scenario lands at 1 to 2% over a decade in Grattan's work. The 2026 package is partial and grandfathered; its modelled price effect is smaller.
• "Abolishing the CGT discount tanks prices." The proposal trims the discount; it does not abolish it. The after-tax return on a held investment changes at the margin, not at the level.
• "Investors will dump stock on Budget night." Grandfathering rewards holders for sitting tight. The expected behaviour is the opposite: a reduction in turnover among existing investor stock, because selling means a new buyer who loses the grandfathered status.
• "Rents will collapse from a supply flood." The new-build carve-out keeps investor incentives intact for the supply-adding part of the pipeline. Rental effects in the modelled scenarios are small.

A worked example

A Sydney inner-west detached house at the local median of around $1.4 million. Apply a Grattan-style softening of 1.5% over a decade. That is roughly $21,000 off the no-reform price trajectory by 2036, in 2026 dollars.

Compare that to typical nominal growth. At 5% per year on a $1.4 million base, the property gains roughly $70,000 in the first year alone. The full ten-year policy effect is in the order of four months of typical annual nominal growth. A rate-cut cycle or a 50-basis- point swing in serviceability assumptions moves the price more than the proposed CGT and negative-gearing package does over a decade.

That is the magnitude check. The policy is real, the direction is downward, and the size is small relative to the cycle. The compositional effect, more owner-occupier and FHB success at auction in the sub-$900,000 segments where investor competition is thickest, is where most of the real-world consequence lives.

The first-home-buyer effect

The displaced-investor channel matters most at the bottom of the price distribution. Investor activity in Australian housing concentrates in sub-$900,000 apartments and townhouses, the same stock that FHBs compete for. Lower investor demand in that segment improves FHB clearance probability at the same price, or shifts the clearing price down slightly for the same FHB bid. Either way, the FHB cohort gets a small but real benefit at the auction line.

The federal first-home-buyer support architecture sits alongside this. The First Home Super Saver scheme and the relevant grants are unchanged by the proposed reforms. The mortgage repayment calculator is the right tool for sizing the FHB scenario at a specific price point and rate.

The rental side

Rents respond to vacancy. Vacancy responds to net rental supply, which is the gap between dwellings rented out and the population that needs them. The published vacancy series across 2024 and 2025 sat near 1 to 2% nationally, well below the 3% threshold usually treated as a balanced market. That tight starting condition is the reason rental effects from any policy change get scrutinised.

The plausible rental impact of the 2026 package is a small upward pressure on rents in established-stock segments and a small downward pressure on rents in new- build segments, netting to a near-zero or modestly positive national effect on rents over the decade. The underlying vacancy story is covered in rental vacancy rates in Australia 2026, which is the chart to watch if you want a real-time read on how the supply side is moving rather than a modelled prediction.

How the news desks have framed it

Coverage in the AFR, the SMH, ABC, and The Australian through Budget week has split predictably along editorial lines. The AFR ran the industry rebuttal prominently; the SMH and ABC carried the Grattan modelling and the FHB framing; The Australian led with the political contest. None of the major outlets published a price-effect number that sat outside the 1 to 3% range over a decade once you read the modelling attribution rather than the headline.

CoreLogic and PropTrack both noted that grandfathering and the new-build carve-out reduce the modelled impact relative to past full-reform proposals. Domain's coverage focused on the compositional shift and on clearance-rate effects in the FHB segment.

Subject to legislation

None of this is in force. The announcement is a Budget measure, not a passed Act. The Coalition has signalled opposition. The Senate cross-bench position is unclear. The 1 July 2027 effect date assumes the legislation passes during the 2026-27 parliamentary year. If the package is amended in passage, the design of grandfathering or the new-build carve-out can shift materially, and the modelled effect shifts with them.

The honest read

The Australian property price level is set by interest rates, net migration, land-supply policy, and credit availability. Tax policy on investor income is a second-order driver. The 2026 Budget proposals, as announced, would soften prices by a small amount over a long horizon and shift the composition of buyers toward owner-occupiers and first-home buyers in the segments where investor competition was thickest. They would not crash the market. They would not flood the rental sector. They would not, on the published modelling, produce a price move large enough to register against the cyclical drivers in any single year.

The broader 2026 outlook is covered in the Australian property market outlook for 2026, which is the cyclical frame the tax debate sits inside. On Burbfinder the suburb pages surface the approval, rent, and population data that drives the local part of any price call, which is where the actual purchase decision gets made regardless of how the Senate vote on the Budget tax measures lands.