Negative gearing reforms expose a new housing trap

Negative gearing reforms may boost new housing, but also lock up the established homes first home buyers need most, writes Dr Ha Nguyen.

THE FEDERAL GOVERNMENT'S negative gearing reform changes one thing: the tax treatment of investment property and as of 29 June 2026, that change is confirmed law.

The idea is simple: remove the tax advantage on established homes and investors should look toward new builds instead; supply goes up, first home buyers get more options. One change meant to move in one direction. But housing supply doesn't work like that, because it doesn't move on one lever.

Seven things have to work together

Whether a first home buyer can actually access a home depends on seven things lining up:

the tax settings;
finance approval;
tradies and labour;
materials costs;
land release;
planning approval; and
what investors choose to do.

The Federal Government only controls one of those seven; the other six sit elsewhere.

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Planning approvals sit with state governments and councils. Land release is a state decision. Trade and labour shortages are tied to immigration settings and TAFE funding; both move on three-to-five-year timelines, not budget timelines.

Materials costs are set globally. Finance conditions are set independently by the Reserve Bank and the Australian Prudential Regulation Authority (APRA), and that lever has already moved on its own: Macquarie, NAB, ANZ, Great Southern Bank and Suncorp have all stopped counting expected negative-gearing tax savings toward serviceability assessments for established-property purchases made after 12 May.

This move is tightening the exact lever the Government doesn't control, in a direction it didn't choose and before the legislation had even passed.

The likely impact on supply has been described as ‘very small, and potentially positive’. Industry estimates put the hit to the new home pipeline at around 35,000 homes over a decade.

That gap is what happens when you move one part of a system and the other six parts don't move with it.

The reform also created a reason to hold

There's a second problem and it comes from how the reform was rolled out. Properties bought before 12 May keep their old tax treatment; that's grandfathering and it's standard practice. You don't retrospectively punish people for decisions made under the old rules.

But grandfathering a tax benefit that grows the longer you hold a property does something else. It gives every investor who owns a pre-12 May property a reason not to sell. Sell and you lose the old tax treatment for good. Buy something new instead and it falls under the new rules.

So, the rational move is to hold. And the properties most likely to be held are exactly the ones first home buyers need most: established homes, already built, ready to move into now.

The Commonwealth Bank said as much in its budget analysis, noting the grandfathering design is likely to encourage longer-term holding. The reform was meant to free up housing stock. Its own design just gave the most useful stock a reason to stay locked away.

Two months on, the market is doing roughly what that design would predict. Capital city sales volumes are running more than 16 per cent below year-ago levels and turnover, not price. The number matters here: fewer established properties are changing hands at all. Prices are falling, too, but that's driven by more than one thing at once — rate rises and softer sentiment among them. A market can fall in price and still lock up stock, if the properties simply aren't being listed. So far, they're not.

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Investors have another way out entirely

Grandfathering explains why an existing owner might hold. It doesn't explain the newer pattern: investors leaving residential property for commercial property instead, sidestepping the reform altogether. Commercial property ‘appears to remain unaffected by the negative gearing tax reforms’, as one industry analysis put it in July, the same tax logic applied to an asset class the reform never touched.

If that shift continues, the reform hasn't just failed to move the other six levers. It's created an eighth one: an exit from the very system it was designed to reshape, into a part of the market sitting entirely outside it.

What would actually fix this

If the supply side can't move fast enough and the reform has just made existing owners more likely to hold, then what's left?

A few other countries already use the answer. South Korea taxes property value held above a threshold, every year, regardless of whether you sell. Singapore's property tax scales with how many properties an investor holds. The UK charges a 5 per cent stamp duty surcharge on second properties. The logic is the same in each case: if holding property is too attractive, change the cost of holding it.

A federal holding cost on investment properties, kicking in after a threshold, would directly counter the lock-in the reform just created. It isn't a punishment. It's a fix for a problem the reform's own design introduced. Grandfathering gave investors a reason to hold. A holding cost would give them a reason to release. It might also close some of the reroute to commercial property, if designed to follow the investor rather than the asset class.

State land taxes already exist but are patchy and easy to avoid through trust structures. A federal version would need careful design; there are constitutional questions to work through. But the problem itself is federal. The Government created the lock-in; the fix belongs with them, too.

On 12 May, the Government put two things in place at once: a supply fix that depends on six levers it doesn't control and a tax change that gives owners of the homes first buyers need most a reason to sit tight. Three months on, both predictions are showing up in the data. It clearly wants to use this kind of lever. The question is whether it's willing to use the other half of it.