The Federal Budget 2026/27 makes housing tax reform a central part of the Government’s housing agenda.

From 1 July 2027, negative gearing for residential property will be limited to new builds, while the 50 per cent capital gains tax discount will be replaced with cost base indexation and a 30 per cent minimum tax rate on capital gains. Existing properties held before 7:30pm on 12 May 2026 will be exempt from the negative gearing changes, and the CGT changes will only apply to gains accruing after 1 July 2027.

The Government’s stated objective is to “level the playing field” for first home buyers while supporting investment in new housing supply. Treasury estimates the changes will support around 75,000 additional owner-occupiers over the next decade and reduce house price growth by around 2 per cent over a couple of years relative to no policy change.

For the residential building industry, the relevant test is more direct: will these changes increase the number of new homes built?

On that test, the Budget papers themselves acknowledge the trade-off. Lower house price growth is expected to reduce new housing supply by around 35,000 dwellings over the next decade compared with no tax policy change, although the Government argues this will be more than offset by other housing supply measures in the Budget.

Modelling work undertaken by Tulip Woods late last year, confirms the Treasury modelling and has estimated that these policies will reduce supply by 22,000 homes over the next 5 years.

This is the central contradiction in the Budget. The Government is simultaneously funding measures to increase housing supply while introducing tax changes that Treasury acknowledges will reduce the supply of new homes.

The positive measures in the Budget are important. The Government has announced $2 billion in housing-enabling infrastructure for water, sewerage and roads, intended to unlock up to 65,000 homes across Australia. Total investment in housing-enabling infrastructure is now estimated at $6.3 billion. The Treasurer also stated that the Budget lifts total housing investment to a record $47 billion and includes planning reforms that could unlock tens of thousands more homes.

These measures go to real constraints in the market. A lack of shovel-ready land, slow approvals, infrastructure bottlenecks, workforce shortages and complex building regulation remain among the largest barriers to increasing new home building. To that extent, the Budget includes measures that are positive for long-term supply.

However, infrastructure and planning reforms take time to translate into commencements. Servicing land, reforming approvals, training workers and lifting productivity are multi-year reforms. They will not materially increase the volume of new homes in the next year or two.

By contrast, the tax changes affect investor expectations immediately.

Limiting negative gearing to new builds assumes that investors will shift capital from established dwellings into new housing. That is possible for some investors, but it is not automatic. Housing investment is not neatly split into separate “new” and “existing” markets. Investors assess residential property as a single asset class, based on after-tax returns, expected capital growth, financing costs, rental yields and policy stability.

If the overall attractiveness of residential investment falls, the likely result is not simply a redirection of capital into new homes. It may be a reduction in total investor participation.

That matters because investors are a critical source of demand for new housing, particularly apartments. Many apartment projects rely on investor pre-sales before construction finance can be secured. If tax reform weakens investor confidence, reduces expected returns or makes residential property appear more politically exposed, some projects that are already marginal may not proceed.

This is the key supply risk.

The Government’s policy may increase the relative attractiveness of new dwellings compared with established dwellings, but still reduce the absolute attractiveness of residential investment overall. We have not been in a situation where housing was treated differently from other asset classes, so the distortion these policies aren’t easy to model.

The CGT changes are really a win for the industry. No longer do we need to face the risk of a 25 per cent discount rate. The government have taken that off the table by shifting from taxing 50% of the nominal gain, to 100% of the real gain. Our modelling suggests that the impact of this change will be marginal, at worst, and potentially a reduction in tax for the decade ahead.

The Budget attempts to protect new housing by allowing investors who acquire new homes to choose either the 50 per cent CGT discount or the new indexation arrangements when they sell. This is constructive, but it may not fully offset the broader decline in investor confidence created by the package.

There is also a rental market risk. Treasury expects the rent impact to be small, less than $2 per week for a household paying the current median rent. That estimate may be plausible in the short term because the dwelling stock is fixed and existing leases adjust slowly. But over the medium term, rents are determined by the balance between rental demand and rental supply. If fewer investor-owned dwellings are built, rental supply will grow more slowly and rents will rise quicker.

The Budget’s housing package therefore has two competing effects. Infrastructure, planning and skills measures support future supply. Tax changes reduce investor demand and, by Treasury’s own admission, reduce new housing supply relative to no tax policy change.

The Budget improves some of the long-term conditions for housing delivery but weakens the near-to-medium term investment environment for residential construction. For builders, this means the benefits of infrastructure and planning reform may not arrive quickly enough to offset the immediate drag from reduced investor participation.

The test for the Budget should not be whether it helps some first home buyers purchase existing dwellings. It should be whether it increases the total number of homes built.

On the Government’s own modelling, the tax changes fail that test in isolation. They reduce new housing supply by around 35,000 homes over the next decade. The Government’s broader housing measures may offset this reduction, but that means part of the Budget’s supply effort is being used simply to repair the damage created by its own tax policy. The additional $3.6bn raised from these measures are sufficient to build around 4,000 public houses.

The risk is that Australia ends up with a more complex tax system, weaker investor confidence and fewer new homes than would otherwise have been built.

By Tim Reardon, Chief Economist of Housing Industry Association

This article was originally published by Tim Reardon on LinkedIn. Republished with permission. Read the original article here.