Australian property tax changes threaten housing shortage and rent increases

Australia’s housing market is facing a severe shortage of homes, with the population growing and construction costs remaining high. Builders are struggling to make projects viable, and rental vacancies are at critically low levels. In this context, government policies should ideally encourage investment in housing and support the construction of new homes. However, the Federal Government’s recent tax changes may have the opposite effect, potentially discouraging investment, reducing construction, and driving up rents.

New economic modelling reveals a concerning outlook

Four leading property organizations in Australia – the Real Estate Institute of Australia, Property Council of Australia, Master Builders Australia, and the Housing Industry Association – have commissioned updated economic modelling from Qaive and Tulipwood Economics. The results suggest that the combined tax changes could lead to a significant reduction in the number of homes built by 2029-30, with an estimated 10,700 fewer dwellings constructed.

The ban on SMSF borrowing is expected to account for around 2,000 of these lost dwellings, resulting in the loss of over 800 construction jobs and a reduction in GDP of almost $200 million. Overall, the modelling estimates that the tax changes could lead to 4,700 fewer construction jobs and a reduction in GDP of almost $1 billion over four years.

According to Joe Branigan, director of Tulipwood Economics, the ban on SMSF borrowing removes a vital source of finance from a market that desperately needs more investment. The broader industry argument is that Australia cannot resolve its housing shortage by making it harder to finance, build, and own homes. As Branigan noted, “the SMSF ban removed a source of finance from a market that is desperately in need of more investment.” The industry believes that this approach will only exacerbate the existing housing shortage.

Renters may bear the brunt of the tax changes

Treasury estimates that the negative gearing and capital gains tax changes will increase rents by less than $2 a week for households paying the current median rent. However, the property industry’s modelling suggests a much larger increase, with rents potentially rising by around $10 a week each year, separate from inflation. This is because when vacancy rates are exceptionally low, landlords have more leverage to increase rents in response to rising costs. If fewer investors purchase rental properties, the resulting shortage of rental homes will likely drive up rents further.

Some commentators have suggested that recent rent increases are evidence that the policy has already failed. However, most of the tax changes do not take effect until July 2027, and current rental increases are primarily driven by the shortage of available accommodation, population growth, higher interest costs, and increased rates and taxes. While property markets are forward-looking, and investors make decisions based on expected returns and tax treatment over the next few years, it is essential to consider the broader context. Developers rely on investor presales to obtain finance and begin construction, so these policies can affect investor sentiment and new housing commitments well before their formal starting date.

Treasury expects the reforms to produce around 75,000 additional owner-occupiers over the next decade and temporarily reduce property price growth by about two percentage points. While this may improve home ownership rates for some households, it does not address the underlying shortage of homes. Established properties that would previously have been bought by investors will be purchased by first-home buyers instead, but this simply changes the tenure of the property without creating new supply. One first-home buyer gains a residence, but the tenant who previously occupied the property must find alternative accommodation.

The construction target is under threat

Australia’s National Housing Accord aims to deliver 1.2 million well-located homes over the next five years to June 2029, requiring an average of 240,000 dwellings per year. However, the construction industry is already facing significant constraints, including labour shortages, expensive materials, lengthy approval processes, and financially unviable development projects. The Housing Industry Association believes that the eventual impact of the tax changes could be even greater than the commissioned modelling suggests, with estimates of up to 40,000 fewer homes being built over the coming decade.