Sound Insights: Potential changes to negative gearing and CGT — what could this mean for the property market?

Tax reform has re-entered the housing conversation, with negative gearing and capital gains tax once again under scrutiny.

While there have been growing reports that the Federal Government is considering changes — particularly to the capital gains tax discount — no reforms have been legislated at this stage. That makes this a policy discussion, not yet a policy outcome.

From a Sound Property Insights perspective, the more important question is not whether these tax settings make headlines. It is whether any change would materially shift the fundamentals that drive Australian property prices.

Our view is that while changes to negative gearing or CGT could influence investor behaviour at the margins, they are unlikely to materially derail the broader housing market on their own. The key reason is simple: Australia’s housing shortage remains the dominant force shaping both prices and rents.

Why this matters now

Negative gearing and the CGT discount have long been central to Australia’s residential investment system. Together, they improve the after-tax appeal of property, particularly for higher-income investors and those pursuing capital growth.

That is why any proposal to wind them back tends to trigger immediate concerns about falling prices, weaker investor demand and further rental stress.

But in our view, the market impact would be more nuanced than the headlines suggest.
Sound Property Insights: Tax changes may soften demand, but they do not create supply

This is the critical point.

Tax settings can change the attractiveness of property investment. They can reduce borrowing appetite, alter investor calculations, and shift demand away from certain segments of the market.
What they do not do is solve the structural undersupply of housing.

Australia is still facing entrenched supply constraints, strong population growth, limited rental availability and ongoing affordability pressure. In that context, even meaningful tax reform is more likely to affect who buys than fundamentally change the overall supply-demand imbalance.

That means the likely outcome is not a sharp, broad-based fall in home values. Rather, it is a more selective adjustment across the market.

Negative gearing: broad-brush reform may miss who investors really are

Sound Property Insights: One of the strongest arguments against broad-brush negative gearing reform is that most property investors are not large-scale landlords. Recent ATO-based figures show around 71.5% of investors never get past one investment property, while 18.9% own two. In other words, around nine in ten investors hold one or two properties. A policy that limited negative gearing to, say, no more than two properties would therefore be aimed at a relatively small slice of the market, with only about 1% of investors owning three or more properties. That suggests any such reform would be more targeted in impact, rather than a market-wide reset.

This is an important distinction in the current debate. Negative gearing is often portrayed as a concession that overwhelmingly benefits large portfolio investors, but the ownership profile suggests the investor market is still dominated by smaller-scale participants. That matters because policy settings aimed at curbing “big investors” may ultimately have a narrower reach than many assume.

Where the impact could be felt most

From our perspective, any changes to negative gearing or CGT would probably be felt most in parts of the market that are already highly dependent on investor participation.

That includes areas where rental yields are low, buyers are relying heavily on future capital growth, investor demand has been inflating competition for established stock, and the asset is less attractive to owner-occupiers.

These segments are more vulnerable because tax settings play a larger role in the investment case.
By contrast, high-quality assets in tightly held locations — particularly those with strong owner-occupier appeal, scarce supply and long-term demand drivers — are likely to remain more resilient.
That distinction matters.

At Sound Property, we have always believed that investment-grade property should stack up on fundamentals first. Tax benefits can enhance returns, but they should never be the main reason to buy.

Could prices fall?

Potentially, but likely modestly — and not evenly.

The most realistic scenario is that reform would place some downward pressure on price growth in investor-heavy markets, rather than trigger a nationwide drop in values.

In practical terms, that could mean slightly less investor competition for existing homes, softer price growth in some apartment or inner-city investor markets, more hesitation from highly leveraged buyers, and increased importance of cash flow and underlying asset quality.

What we do not see is tax reform alone causing a major correction across the national market.

Why? Because prices are still being supported by broader fundamentals including population growth, constrained supply, tight vacancy and the ongoing shortage of well-located housing.

Sound Property Insights: The rental market is where the real risk sits

This is the part of the debate that deserves more attention.

If investor demand weakens without a corresponding lift in housing supply, the rental market could tighten further. That is particularly relevant in Australia, where private investors still provide the overwhelming majority of rental housing.

So while reducing tax concessions may be framed as an affordability measure, the outcome is not automatically lower housing costs overall. If fewer investors purchase rental stock and new supply does not fill the gap, renters may end up facing even greater pressure.

That is why policy design matters enormously.

Any reform that discourages investment into established housing while preserving incentives for new construction would likely have a very different market impact to a blanket change across all residential property.

What investors should focus on now

From an Sound Property Insights perspective, this is not a moment for panic. It is a moment for discipline.
There is still no confirmed policy. But even if changes do come, they would reinforce a trend we have been talking about for some time: investors can no longer rely on broad market growth, tax settings or cheap credit to do the heavy lifting.

The focus needs to stay on asset quality, local supply constraints, owner-occupier demand, long-term income resilience, and scarcity.

In weaker-quality markets, tax reform could expose assets that were only ever supported by investor incentives. In stronger-quality markets, sound fundamentals should continue to underpin performance over the long term.

The bottom line

From our perspective, potential changes to negative gearing and CGT may change the shape of investor demand, but they are unlikely to override the bigger structural issue in the Australian housing market: too little supply relative to demand.

That means we would expect any price impact to be selective rather than systemic.

For investors, the message is clear. Policy uncertainty is real, and it should be monitored closely. But the best defence against changing tax settings is the same as it has always been: owning high-quality property in markets with enduring fundamentals.

That is where smart investing remains grounded — regardless of the tax regime.