Why Scrapping Negative Gearing Will Not Fix Housing Affordability — and What Would

A reform sold on the wrong promise

The Treasurer framed the 12 May 2026 reform of negative gearing and the CGT discount as a fairness-and-affordability measure. The Budget speech put it directly: "tax support targeted at new supply, fairness for younger Australians".

The political pitch is intuitive. Investors compete with first home buyers. Investors get tax breaks first home buyers do not. Remove the tax breaks, and first home buyers should benefit at the auction.

The peer-reviewed economic evidence is far less generous. The most recent quantitative study — Cho, Li and Uren (2024), published in the International Economic Review — modelled the joint abolition of negative gearing and the 50% CGT discount in a calibrated overlapping-generations model of the Australian housing market. The results:

• House prices: −1.5% in the long run
• Rents: +3.6% in the long run
• Home-ownership rate: +4.3 percentage points
• Welfare gain: +0.13% of lifetime consumption (with revenue lump-sum recycled)

So the reform will deliver a small home-ownership boost. But the price effect is tiny relative to typical annual price growth (5-7%), and rents go up, not down. The "affordability win" depends on which side of the rent-versus-buy decision you sit on.

Why prices barely move

The simple version of "remove tax breaks, prices fall" assumes investor demand was holding prices up. The data does not support this in the way the political pitch implies.

DEMAND-SIDE COMPOSITION OF AUSTRALIAN HOUSING TRANSACTIONS, 2024-25
Source: ABS Housing Finance, CoreLogic, ATO Taxation Statistics

  First home buyers          [████████████░░░░░░░░░░░░░░░] 22%
  Owner-occupier upgraders    [████████████████████░░░░░░░] 39%
  Investors (all)             [█████████████░░░░░░░░░░░░░░] 25%
  Foreign / other             [██░░░░░░░░░░░░░░░░░░░░░░░░░]  3%
  Refi / construction         [██████░░░░░░░░░░░░░░░░░░░░░] 11%

Investors are 25% of demand. Even if reform removed half of investor demand permanently (it will not — grandfathering and the new-build carve-out preserve a large share), the marginal price effect is 1-3% at most. Owner-occupier demand and population growth are the dominant price drivers.

Why rents go up

This is the part of the story that gets missed. Negative gearing makes the marginal investment property economically viable at lower rental yields. Strip away the tax shield and one of two things happens:

1. Investors require higher rents to compensate, or
2. Investors leave the market, reducing rental stock

Australian rental supply is heavily dependent on individual investors. Roughly 2.26 million Australians owned a rental property in 2022-23 (ATO). The total private rental stock in Australia is about 2.8 million dwellings (ABS Housing Census). That is ~80% of all rental supply coming from individual investors — and ~50% of those individuals were negatively geared.

The arithmetic flows downstream. Reduce the after-tax return on holding rental property, and either rents rise to restore the equilibrium return, or the rental pool shrinks. In a tight market — Australian national vacancy is below 1% — there is no slack for the rental pool to shrink without further rent pressure.

What the model actually says about who wins

Cho/Li/Uren is unusually careful about distributional impact. The headline 0.13% welfare gain hides a wide dispersion:

The reform is a transfer from current renters to future first home buyers. That is a politically defensible outcome — younger Australians have been losing for a generation — but it is not the same as "improving housing affordability". It improves buying affordability slightly, at the cost of renting affordability noticeably.

What would actually move the price dial?

If the genuine goal is structural affordability — both rent and price falling materially — the policy options that move the dial are well documented and far more politically difficult:

1. Restore meaningful immigration-to-housing-supply linkage. Net overseas migration averaged ~430,000 p.a. through 2024-25. National dwelling completions averaged ~165,000 p.a. Housing supply is running 30%+ below the National Housing Accord target. No tax policy can solve this. Either supply rises or population growth falls.

2. Rezone for density. Sydney's "missing middle" is the textbook example. Detached-home zoning covers 84% of the residential metro footprint while accommodating 38% of demand. Victorian and NSW reform of single-residence zoning would unlock 200,000-400,000 additional dwellings in established suburbs over a decade. The 2025 NSW low-and-mid-rise reform is a first step; it covers ~5% of what is needed.

3. End stamp duty in favour of broad-based land tax. Stamp duty taxes mobility. Working households over-pay to stay in oversized homes because moving is taxed at 4-5% of asset value. ACT and Victoria have begun this transition; the rest of the country has not. ASIC Moneysmart and the Productivity Commission have called for nationwide reform for over a decade.

4. Index the First Home Super Saver scheme to median deposit, not nominal caps. The FHSS cap has not kept pace with the deposit reality. A scheme designed in 2017 around a $350,000 first home is structurally incapable of helping a 2026 first home buyer facing a $750,000 entry price.

5. Treat construction sector productivity as a national project. Productivity Commission analysis shows real construction productivity has fallen over the past decade — the only major industry with that record. Industrialised construction, modular housing, and trades training are unsexy but structurally decisive.

None of these are in the 2026 Budget. The tax reform is the politically available lever, not the structurally consequential one. That is a fair political choice — but it should be argued honestly, not sold as a housing solution it cannot deliver.

The case the Treasurer should have made

If I were the Treasurer, I would have argued for the reform on revenue and fairness grounds, not affordability grounds:

The CGT discount and negative gearing together cost the Budget around $29 billion a year. They are heavily skewed toward the top 10% of income earners. They are unusual by international comparison. They are not the cause of the housing crisis, but neither is fixing them. We are reforming them because the revenue is needed and the distributional fairness has run out. Housing affordability is a separate, harder problem we are tackling through supply, zoning and migration policy.

That is a defensible argument. The argument that "ending negative gearing will fix the housing crisis" is not. The risk is that when 2030 rolls around and rents are 12% higher and prices are 8% higher (because the supply story did not get fixed), the reform gets blamed for both — and the next government repeals it.

Reform deserves an honest case. Let us hope someone makes it before 1 July 2027.

Model the implications: Capital Gains Tax Calculator | Negative Gearing Calculator | Buy vs Rent Calculator.

Sources: Cho, Li & Uren (2024) "Investment Housing Tax Concessions and Welfare: A Quantitative Study for Australia", International Economic Review; Grattan Institute "Hot Property" (2016); ABS Housing Finance Australia; ABS Census 2021 housing tenure; ATO Taxation Statistics 2022-23; Productivity Commission construction productivity inquiry (2024); NSW Department of Planning low-and-mid-rise reform (2025); Treasury Tax Expenditures and Insights Statement (2024).

This article is opinion and analysis, not tax or investment advice.