What the Auction Data Really Shows: CGT and Negative Gearing Changes Are Already Reshaping the Property Market

The Policy Change in Plain English

The 2026 Federal Budget made two significant changes to the tax treatment of property investment in Australia, both effective from 1 July 2027 for new purchases made after 12 May 2026.

Negative gearing restriction: Investors who buy established residential properties after 12 May 2026 can no longer offset rental losses against their salary and wages. Instead, those losses must be carried forward and offset against future rental income from the same or other residential properties. The restriction does not apply to new residential builds, build-to-rent developments, widely held trusts (including most managed investment trusts), superannuation funds, or investors supporting government housing programs.

CGT discount replacement: The 50% capital gains tax discount is replaced by CPI cost-base indexation from 1 July 2027. Instead of halving your capital gain automatically, your original purchase price is adjusted upward for inflation before calculating the taxable gain. Real gains above inflation are subject to a 30% minimum tax. Investors in new builds can choose whichever method is more favourable at the time of sale.

The grandfathering is the most important nuance: any property already owned before 12 May 2026, including properties under a signed contract but not yet settled, continues under the existing rules indefinitely. If you are an existing property investor who was negatively geared before the budget, nothing changes for those properties.

What the Forecasts Say: CBA's Updated Outlook

Commonwealth Bank economists updated their housing outlook in the days after the budget, cutting their December 2026 dwelling price growth forecast from 5% to 3%. Their 2027 forecast was left unchanged at 3%, reflecting an expectation that the one-off sentiment shock from the budget fades but the structural demand shift from investors remains.

The CBA base case models prices ending around 2-3% below what they would have been without the budget changes over a 3-year horizon. The key transmission mechanism is reduced investor demand for established dwellings, particularly apartments and townhouses in inner-city markets where investor participation is highest.

In an adverse scenario, where investor sentiment is more severely affected than modelled, or where the quarantining rules prove harder for investors to navigate than anticipated, prices could fall up to 5.5% below the pre-budget baseline over 3 years. CBA does not describe this as the central case, but flags it as a plausible tail risk if confidence deteriorates sharply.

The Investor Rate-Rise Equivalent: 90 to 155 Basis Points

One of the most striking framings in CBA's analysis is the effective rate increase that the negative gearing removal represents for different investor profiles. Removing the ability to offset losses against salary is economically equivalent, in terms of after-tax holding cost, to the following increases in investor mortgage rates:

For context, one standard RBA rate hike is 25 basis points. The 155bp upper estimate is equivalent to more than six consecutive RBA rate hikes in additional cost burden for the most leveraged high-income investors. Even at the lower end, 90bp is equivalent to nearly four hikes. This is why the investor segment of the market, particularly those who were most reliant on the tax offset to support negatively geared properties, is pulling back fastest.

Which Markets and Segments Are Most Exposed

Not all property segments face the same impact. Treasury and CBA both note that the price effect will be concentrated in the market segments where investor participation is highest. That means inner-city apartments, established townhouses, and lower-priced investment-grade stock are more exposed than owner-occupier-dominated detached housing markets.

New residential builds sit at the opposite end: they are explicitly exempt from all negative gearing restrictions, can use either the CGT discount or the indexation method at sale, and are likely to attract a greater share of property investment capital as a result.

The New Build Advantage: Why Construction Loans Are in Demand

New residential builds are the clear beneficiary of the post-budget tax landscape. They retain full negative gearing against all income, investors can choose between the 50% CGT discount and CPI indexation at the time of sale, and they are also more likely to qualify for the First Home Guarantee scheme for owner-occupiers, which eliminates LMI for eligible buyers with a 5% deposit.

Construction activity may remain neutral to slightly positive overall, as the budget policy deliberately redirects investor capital from established to new builds, which aligns with the housing supply objectives. The pipeline effect is that investors who previously bought established inner-city apartments as a tax-advantaged strategy are now being incentivised to consider house-and-land packages, townhouse developments, or off-the-plan apartments in new buildings.

For investors considering a new build, understanding how construction loans work is essential. Unlike a standard mortgage, construction loans release funds progressively across building stages, and you pay interest only on the drawn amount during construction. A broker with construction loan experience can structure the facility to minimise your holding cost during the build period while ensuring the loan converts cleanly to a standard P&I mortgage on completion.

What Investors Should Do Now: 5 Action Steps

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