Small uptick in property investor activity expected ahead of negative gearing changes starting July 2027

A small uptick in property investment activity is expected ahead of negative gearing being restricted to newly built homes from July next year.

While tax breaks for rental losses are being grandfathered for existing investors, landlords who buy an existing home between now and June 30, 2027 will only be able to temporarily access negative gearing.

Despite not being able to permanently access the tax break, Starr Partners chief executive Doug Driscoll is still expecting a modest uptick in investor activity before July next, as the head of a property management group focused on western Sydney.

“I do think we will see an uptick, but I don’t think it will be what we would ordinarily expect,” he told The Nightly.

“If the market wasn’t already in a precarious position I would suggest that we would see a stampede for people trying to buy and get in and buy before that deadline next year.

“People are careful and cautious at the moment - people are adopting a wait-and-see mentality.”

Treasury explained transitional arrangements will apply for homes bought after Treasurer Jim Chalmers delivered his Budget speech on Tuesday night, until negative gearing is restricted to brand new homes from July 1, 2027.

“Properties purchased may be able to be negatively geared during this period, but not in subsequent years,” the Budget papers said.

“In practice, the benefits to existing investors from these transitional arrangements are not expected to continue indefinitely.”

Those buying an investment property from July 1 next year will also lose access to the 50 per cent capital gains tax discount.

Instead, landlords selling a property would have to index the gain for inflation, reverting to a system that existed from when Labor’s capital gains tax debuted in September 1985 until the capital gains tax concessions regime started in September 1999 under a Coalition government.

A minimum tax of 30 per cent would be payable in property investments.

The Reserve Bank’s interest rate rises in February and March were already turning off investors with a 5.3 per cent drop in investor loans during the March quarter, marking the biggest fall since late 2022 when the Reserve Bank was last aggressively hiking interest rates, new Australian Bureau of Statistics data released on Wednesday showed.

The size of average new investor loans also fell by 1.1 per cent from $717,000 to $709,000 during the quarter.

The data was taken before the RBA hiked rates again earlier this month to 4.35 per cent, undoing the effects of three rate cuts last year.

Westpac economist Neha Sharma is expecting a moderation in investor loan activity.

“Budget measures announced yesterday rebalance tax incentives away from leveraged property investment, while new build investments will receive a more concessional tax treatment than established homes,” she said.

“This is expected to see investor lending volumes moderate over time and progressively shift toward loans for construction and new dwelling purchases.”

Former Reserve Bank economist Zac Gross, now a senior lecturer at Monash University, is only expecting a 2-3 per cent dent in house prices as a result of Labor’s negative gearing and capital gains tax changes.

“I think the overall effect on house prices will be moderate,” he told The Nightly.

Wages during the year to March rose by 3.3 per cent, which was only a third the 10.5 per cent national increase in house prices, driven by strong, double-digit gains in Brisbane, Adelaide and Perth, Cotality data showed.

University of New South Wales economics professor Richard Holden’s 2015 report for the Labor-aligned McKell Institute think tank recommended grandfathering existing investors but ending negative gearing immediately for existing properties.

“It kind of levels the playing field between owner-occupiers and investors, it raises some money, it bolsters financial stability but what it doesn’t do and was never intended to do, or designed to do, is to address the fact that if you look at price-to-median income ratios, Sydney’s the second most expensive city in the world,” he told The Nightly.

“It won’t deal with that, that’s a housing supply issue.”

But contrary to his recommendation a decade ago, to immediately curb negative gearing, the Budget has instead delayed the restriction of negative gearing by a year.

Labor lost the 2016 and 2019 elections with a plan to scrap negative gearing for existing properties soon after the election.