Australian landlords are bracing for sweeping Budget changes expected to trigger a wave of forced property sales, with economists warning house prices could slide by up to 4 per cent as Labor winds back negative gearing and the CGT discount.
Treasurer Jim Chalmers is tipped to abolish negative gearing and scrap the 50 per cent discount on capital gains for existing properties purchased after he hands down his fifth budget on Tuesday night.
While the changes may offer a glimmer of hope to younger Australians locked out of the housing market, critics warn the plan risks rattling investors and fuelling higher rents which are already at record highs across the capitals.
Barrenjoey chief interest rate strategist Andrew Lilley forecast the Albanese government’s expected changes to the capital gains tax discount and negative gearing could cause house prices to fall sooner rather than later.
He added a sustained decline in house prices would help to dampen household spending and inflationary pressures, reducing the need for the Reserve Bank to further increase interest rates.
‘I think it is likely that house prices will be in decline in each of May, June and July,’ Lilley told the AFR.
‘The house price effect is the principal reason we expect the RBA would be able to remain on hold for the rest of the year.’
According to Lilley’s paper, the capital gains tax change will lower house prices by about 1 per cent to 2 per cent.
Barrenjoey strategist Andrew Lilley (pictured) forecast the Albanese government’s expected changes to the CGT tax discount and negative gearing will see house prices fall immediately
Treasurer Jim Chalmers (pictured) arrives to hand down the 2026 Budget at Parliament House on Tuesday with proposed changes to property tax concessions sparking intense debate
If paired with scrapping negative gearing on new investments, while grandfathering existing ones and exempting new builds, Mr Lilley said prices could fall a further 2 to 3 per cent.
‘This would turn around the mini boom in housing and consumption that began with the introduction of the first home owner’s guarantee,’ he said.
Those forecasts were echoed by UNSW Professor of Finance Peter Swan, who warned stripping back the tax concessions would force thousands of property sales and push rents even higher.
‘Negative gearing is perfectly legitimate and part of every tax system, hence a possible fall in house prices,’ he told the Daily Mail.
‘Will the young benefit? No. Any such sales will come out of the rental pool, driving up rents.
‘The policy reversal seems to be designed for the opposite purpose, to push up rents.
‘When last adopted by the Hawke-Keating government it was rapidly abandoned because of disastrous consequences.’
Mr Swan said any rollback of the rules would hit the supply of rental housing, which he argued is largely driven by negative gearing, warning its removal would have serious consequences for renters.
‘Doubtless, it will be reversed for a second time,’ he said.
UNSW Professor of Finance Peter Swan (pictured) warned stripping back the tax concessions would force thousands of property sales and push rents even higher
‘Neither the CGT discount or negative gearing have contributed to housing unaffordability.
‘Council development controls, supply restrictions and rising construction costs, together with massive immigration, have created the housing crisis.’
Mr Swan said he knew of no reputable economist recommending to remove negative gearing.
‘It is Treasury that has always campaigned for it. The Tax Act says that income should be taxed,’ he said.
‘Most economists want to preserve negative gearing because without it, rental supply will dry up.’
Queensland landlord Stephen O’Brien has already warned he would increase the rent from $865 to $1,235 a week on his investment property if the government pushes ahead with major changes to capital gains tax and negative gearing.
He said if his tenants could not afford the increase, they could find somewhere else to live.
‘Our investment property is on the coast in a high-demand location, within walking distance of a patrolled beach,’ he said.
The shocking reality of Sydney’s rental crisis as a 100 people queue to inspect ‘tiny’ studio stretches onto the street like a nightclub line
‘If there are no deductions, why run my investments at a loss? So who crashes out from Treasurer Jim Chalmers’ reforms? It won’t be me.’
His comments come after former treasury economist Leith van Onselen warned on Monday the housing market is heading for its biggest correction in 40 years with rising interest rates, surging supply and a weakening jobs outlook creating a ‘perfect storm’ for property prices.
As house prices start to fall in Sydney and Melbourne, he predicted Australia was likely to follow the path of comparable economies such as New Zealand and Canada, where house prices have already fallen by about 20 per cent.
However Canstar data insights director Sally Tindell said while speculation is at fever pitch as to what the government will do with generous property tax concessions, a significant correction was unlikely.
‘If you are an existing investor, make sure you look past the headlines and dig into the details, in particular any grandfathering exemptions,’ she said.
‘The changes could well change the tax policy landscape, but whatever the government has planned, it’s hard to see house prices falling off a cliff, considering they survived a global pandemic and 13 rate hikes in 2022-2023.’
