Who are the Australians who could be caught in the middle of housing tax reforms in the federal budget? The government says changes to negative gearing and capital gains tax are designed to improve housing affordability and level the playing field for younger generations. But some experts warn the reforms could also create unintended consequences for Australians trying to build wealth and break into the property market.
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TRANSCRIPT
A growing number of young Australians are already thinking outside the box to pursue home ownership — buying interstate properties they never plan to live in, renting while investing in other assets, or living with relatives to save a deposit.
While some are optimistic reforms to negative gearing and capital gains tax announced in the 2026 federal budget will help cool soaring prices and investor demand, others fear the new policies could complicate their pathways into the market.
Experts say renters and young investors could be caught in the middle.
At 26, Alexander Clisdell has been working hard to set himself up for the future, living with family while putting aside money to save and invest.
“I've diligently kind of worked from the age, of like 21 to 26, worked every single day, saved and invested, kind of done the right things. And then, you know, really into my kind of, like, shares and investments."
Last year, he began the process of buying an investment property in Sydney.
After securing pre-approval through a mortgage broker, he planned to attend an auction within weeks.
But the negative gearing reforms announced in the May budget will dramatically reduce his borrowing power, he says.
After speaking with his broker, he realised the property was no longer within reach.
"Really the main thing is having the serviceability to get the loan to meet the investment, which is now gone. If anything, it feels almost like the system has kind of failed the younger generation. You know, I did all the right things to get myself in a position where I could purchase an investment like that, and then, out of no fault of my own, it feels like the system's almost just taking that away from you."
Negative gearing can improve an investor's cash flow position by using losses on an investment property to reduce their taxable income — something that brokers say can also affect borrowing calculations.
Under the reforms, that benefit will no longer apply to buyers of existing homes but will remain available for newly built properties.
The changes to negative gearing will be grandfathered, meaning those who bought before budget night will retain the tax benefit.
Capital gains tax will also change from July next year.
Under the previous system, when a person sold an asset, they had held for at least a year, they would only have to pay tax on 50 per cent of the capital gain.
The new system will remove this benefit and introduce an inflation-indexed system.
But, existing investors will be able to retain the previous tax benefit for gains they have already accrued under the old system.
The change applies to all assets — not just property.
Alexander says the changes will affect where he can afford to buy.
"That dream of purchasing an investment property to set up my family in Sydney, in New South Wales, it's probably not going to happen anymore."
Alexander is now taking a step back and considering more affordable options interstate.
As for his share portfolio, he says the game has changed due to the elimination of the capital gains tax discount.
"That older generation, they had the benefits of capital gains benefits, negative gearing, and that's what they used in terms of their benefit to build their wealth. What our wealth building looks like in the future? Who knows."
Rentvesting is a name given to people who choose to rent while buying property in more affordable markets in order to get on the property ladder.
Nicola Powell, Domain's head of research and economics, says the tax reforms have changed the outlook for rentvestors and other young people trying to build wealth.
"We've seen the younger generation take different paths in order to build wealth and to get into the housing market. And those different paths have been rentvesting, which is something that has been born out of the high cost in some of our major capital cities and younger generations, trying to build a path to home ownership. But it's also seen a rise in people investing in EFTS, as you mentioned, in shares, in order to grow their wealth, to get that deposit to buy their first home. And ultimately, it is going to be harder for them to do that now, because the CGT changes affect everything."
However, Tim Lawless, the executive research director of Cotality's Asia-Pacific division, says lending data suggests rentvesting remains a relatively niche strategy.
"So there is some data here from the ABS, just from the lending indicators data they put out every quarter. And there's a subset of the data, which is first home buyers borrowing as an investor, and it's only about 5.6 per cent all first home buyers would be borrowing or lending for non-occupation purposes."
In a positive for first home buyers, Powell says the reforms could reduce competition from investors for established homes and make it easier for young people to enter the market.
However, she warns this could also worsen affordability for renters.
"We will probably see who owns start to shift, and we will see greater participation from first time buyers. But those left in the rental market are going to be feeling it, and those that are going to be left in the rental market are going to be those low-income households that just, you know, the prospects of purchasing home just are not there for them. And it's going to be new, new entrants into the rental space, whether that's people you know, leaving, you know, their family home, and, you know, making the path on their own, or whether it's new migrants into Australia. So, I actually think the paradox here is that renters trying to save a deposit are going to be challenged under the impact of higher rents.
Government modelling suggests the tax changes will slow house price growth by about 2 per cent annually, while lifting median rents by just $2 a week.
But Powell suspects it's going to have a bigger impact.
She pointed to New Zealand as a case study.
Its government introduced reforms in 2021 that significantly reduced tax deductions for residential property investors, but the policy was reversed after a change of government.
“They saw, as a result, rental prices increased significantly, and as a result of that, they then wound back the changes that they made and reintroduced negative gearing. So I think that there are lessons to be learned from not far away that can tell us that the impact on rents is going to be vast, and I hope that the government are right with it, where it's only just $2 a week, but I suspect with the impacts on rents are going to be much greater than that."
Nate Pedrotti is a 29-year-old renting with his fiancée in Melbourne while they save for a home.
While he believes rent rises are a possibility, he's encouraged by the steps the government has taken in the budget.
"It just evens the playing field a little bit between people like myself who are trying to break into the market, and people who are maybe buying their third, fourth, fifth house."
He hopes the state government takes more responsibility when it comes to stabilising rents, capping how much landlords can hike prices.
For first home buyers, the changes could reduce competition for established homes.
But with negative gearing benefits remaining for new builds, this could funnel investors into those markets.
So, while the budgetary changes were designed to bring down pressure for first time buyers, Lawless says new homes on city fringes could be a friction point where they're now forced to compete with more investors.
For aspiring homeowners like Alexander, it's hard to predict what the future holds.
"I think for me now, will I be purchasing an investment property in the next few months? Maybe not. I think the best step for me is kind of take a step back, see how the market recalibrates, kind of see what the new board kind of looks like, and kind of take it from there."
