What Will Tax Changes Mean For The Housing Market? A View

The Australian property market confronts a structural turning point as the government’s May 2026 budget dismantles key tax concessions that fuelled decades of real price growth, with Macquarie forecasting flat or negative real returns for the next 10 to 20 years.

Companies in the space have seen share prices drop, with Stockland shares (SGP) down 29.4% so far this year, Mirvac (MGR) down 16.67%, GPT Group shares (GPT) fall back 10.99%, Charter Hall Group (CHC) drop 19.27%, and REA Group pull back 18.61% since the turn of 2026.

The May 12 federal budget formally abolished the 50 percent capital gains tax discount for individuals and trusts, replacing it with cost-base indexation and a 30 percent minimum effective tax rate from July 1, 2027. Simultaneously, negative gearing on residential property will be restricted to new builds that add to housing supply, with existing properties losing full tax deductibility of rental losses against other income. Properties held as of 7:30pm AEST on May 12, 2026 are grandfathered under current rules, but new purchases after that date face the tightened regime.

The policy overhaul marks a decisive shift in a market that has delivered 160 percent real price appreciation since 1980, equivalent to 2.1 percent compound annual growth. However, Macquarie’s analysis reveals that two-thirds of that period saw flat real prices, with gains concentrated in two distinct bursts: a 45 percent surge between 2000 and 2003 following the introduction of the CGT discount, and a 55 percent rise from 2012 to 2022 driven by ultra-low interest rates.

Levelling the playing field?

Treasurer Jim Chalmers pitched the reforms as levelling the playing field for first-home buyers and improving intergenerational fairness. Government modelling suggests the changes will enable approximately 75,000 additional Australians to enter the market as owner-occupiers over the next decade, as investor demand is partially crowded out. The combined measures are forecast to raise between 3 billion and 4 billion Australian dollars over five years, though revenue projections assume ongoing nominal price growth and transaction volumes.

The structural case for prolonged stagnation rests on the exhaustion of tailwinds that supported the market since 1997. Falling real interest rates, financial deregulation, higher credit availability, and rising female workforce participation all contributed to price appreciation over the past generation. Most of these drivers have now plateaued or reversed.

Interest rates are no longer in a secular downtrend, household leverage is already elevated, and female participation rates have stabilised. The removal of generous tax concessions eliminates the final major support for further real price growth.

Historical precedent supports the case for extended sideways movement. Melbourne took approximately 11 years to surpass its 1989 peak, while Perth required 17 years to recover 2006 levels.

Real prices have fallen more than 9 percent on six occasions since 1980, including twice in the past decade during the post-mining boom adjustment and the 2017 to 2019 tightening phase. Macquarie argues that post-affordability stress periods historically result in long stretches of flat or declining real prices, and current affordability metrics suggest Australia is entering such a phase.

Impact of CGT discount removal

The property and real estate lobby has warned that curtailing the CGT discount and tightening negative gearing will discourage investor participation, reduce rental stock, and potentially push rents 2 to 3 percent higher by 2029. Industry modelling suggests dwelling starts could fall by tens of thousands annually as investor capital is redirected elsewhere, whilst major real estate groups have cautioned that reduced investor activity could exacerbate rental supply shortages during an acute affordability crisis.

Judging from the latest commentary, it appears as though most agree the package will trim investor demand and cool price growth, particularly for existing dwellings. NAB and other bank economists estimate aggregate price declines of mid-single digits in real terms, rather than a catastrophic 20 to 30 percent crash, due to grandfathering provisions and generous treatment of new builds.

A Senate inquiry into the CGT discount concluded in early 2026 that the current 50 percent discount plus negative gearing distort the housing market toward investors and undermine affordability. Treasury modelling presented to the inquiry suggested that curbing CGT deductions and negative gearing mainly shifts ownership from investors to owner-occupiers, with limited aggregate price or supply effects in official models.

The revenue implications of Macquarie’s flat-real-price scenario present a tension with political expectations. If real prices stagnate for a decade or two, incremental CGT revenue from housing will prove negligible, as the base fails to grow in real terms. Behavioural responses including lower turnover, longer holding periods, and substitution to other asset classes could further disappoint revenue forecasts. The government’s estimates rely not on explosive price appreciation but on higher effective tax rates on gains and ongoing nominal price growth, yet under Macquarie’s scenario the revenue side appears over-hyped relative to political promises.

With structural tailwinds exhausted and tax settings shifting from support to headwind, Australian housing markets could be set for a prolonged period of sideways movement punctuated by periodic real declines, echoing the post-boom adjustments seen in Melbourne and Perth over the past generation. Markets will be keeping a close eye on transaction volumes, activity levels, and rental markets through 2027 to see whether the new regime delivers the affordability relief promised or simply reallocates ownership.

Bull Case: