It now appears likely that the proposed tax changes affecting established residential property will be enacted into law. Given this, I thought it was worthwhile revisiting whether investing in established residential property remains an attractive long-term investment option.
The return problem: more cash in, but no higher capital growth
Quarantining the negative gearing benefits associated with investing in established residential property materially reduces the attractiveness of investing in this asset class. Anyone who suggests otherwise probably has a vested interest.
That should not be controversial. The ability to claim negative gearing materially reduces an investor’s annual holding cost. If that tax benefit is quarantined, the investor must fund a much larger cash shortfall from their own income. But they are not going to earn a higher return (capital growth).
Most investors borrow close to the full cost of acquiring an investment property, at least initially. As such, their main capital contribution is not the deposit, but the ongoing after-tax holding cost.
For example, assume an investment property generates net rental income of $20,000 per year, but the interest cost is $60,000. The property is losing $40,000 per year before tax. Under the pre-Budget negative gearing rules, if that loss can be offset against other income, the investor might save up to 47% in tax. That reduces the after-tax cash cost from $40,000 to approximately $21,200.
However, if the loss cannot be offset against other income, the investor receives no immediate tax benefit. The annual out-of-pocket cost becomes the full $40,000 shortfall after rent. In other words, the same asset costs materially more to hold, yet the investor does not receive any additional return for contributing more capital each year. The capital growth potential of the property has not changed simply because the tax treatment has become less favourable.
It is true that quarantined negative gearing losses may reduce the amount of capital gains tax payable when the property is eventually sold. But that is a poor substitute for receiving a tax benefit each year. The time value of money matters. A tax benefit today is worth more than a potential tax benefit many years into the future.
This is captured in the internal rate of return, which expresses the annualised return generated on the capital an investor contributes. When borrowing to invest in residential property, the relevant capital contribution is usually the money the investor must fund from their own income to cover the property’s holding costs.
My estimate is that, under the pre-Budget tax settings, an investment-grade established residential property might have produced an after-tax internal rate of return of around 11% per annum. However, once you account for quarantined negative gearing losses and higher capital gains tax, that return could fall to approximately 8.4% per annum.
That is a very different proposition. An investor may be able to achieve a similar after-tax return by contributing more to superannuation, without the debt, concentration risk, liquidity constraints, transaction costs, legislative risk, tenant issues and general hassle associated with owning an investment property.
For this reason, borrowing to invest in established property is nowhere near as attractive as it has been in the past. In many cases, there are likely to be better investment opportunities elsewhere.
Why the family home may now be the better property strategy
In 2024, I wrote a blog about a strategy I called “livevesting”. It was a play on the term “rentvesting”, but it moved in the opposite direction.
Rentvesting typically involves renting where you want to live and investing elsewhere. Livevesting means doing the opposite. It involves directing as much of your financial capacity as possible into one asset, being your home.
In simple terms, it means deliberately putting all your eggs in one basket.
Instead of owning both a home and an investment property, the strategy is to own a better-quality home and allow that asset to compound in value over several decades. There are often significant lifestyle benefits associated with doing this too. But the financial benefit can also be substantial, because any capital growth on your principal residence is tax-free.
One of the historical attractions of investing in established property was the negative gearing benefit that often accompanied it. This was particularly attractive for higher-income earners, as it allowed them to leverage equity in their home and high income, borrow to invest, and reduce the after-tax cost of holding an investment property.
However, once negative gearing losses are quarantined, and capital gains tax rates are higher, the relative attractiveness of borrowing to invest in residential property diminishes materially.
In that environment, investing more heavily in your own home becomes more attractive. You are directing capital towards an asset that can provide both lifestyle benefits and tax-free capital growth. That combination is powerful, especially over a multi-decade timeframe.
This is potentially even more compelling today because family homes in Melbourne, and to a lesser extent Sydney, appear to offer better relative value compared with the recent performance of other capital cities such as Adelaide, Brisbane and Perth. Those markets have performed very strongly, whereas Melbourne has been comparatively subdued. That relative underperformance may create an opportunity for long-term buyers.
Of course, there’s a big caveat.
If you are going to livevest, you must make friends with the idea of downsizing in the future. The strategy only works financially if you are ultimately willing to crystallise some of the equity that has accumulated in your home, on a tax-free basis, and use that capital to help fund retirement.
That will not suit everyone. Some people will not want to downsize. Others may become emotionally attached to the family home. And some may prefer the diversification and flexibility that comes from holding investment assets outside the home.
But for the right person, livevesting may now be a more attractive strategy than borrowing to invest in established residential property. The combination of lifestyle utility, potential long-term capital growth and favourable tax treatment is difficult to ignore.
The obvious alternatives may be poor substitutes
There will no doubt be plenty of buyer’s agents espousing the benefits of investing in commercial property or newly constructed property such as house and land packages, or off-the-plan apartments.
I would be very cautious.
I recently wrote about commercial property valuations. In my view, valuations already look very tight, and I suspect they may become even tighter if more investors are pushed towards commercial property as a substitute for established residential property. As a general rule, commercial property looks unattractively priced to me at this stage.
I have also written about newly investing in constructed property a few times over the years. The reality is that these assets almost never make good long-term investments.
There are three main reasons for this.
Firstly, they are often located in non-investment-grade locations. House and land packages tend to be situated on the outskirts of capital cities, where land supply is typically abundant. Off-the-plan apartments are often located in large apartment complexes, frequently on busy main roads or in areas with a lot of competing supply.
Secondly, most of the purchase price is usually reflected in the improvements, not the underlying land value. That matters because, over the long run, land tends to appreciate, whereas buildings depreciate. If most of your capital is allocated to a depreciating asset, the investment has a structural headwind from day one.
Thirdly, the price paid is not always determined by an open and transparent market. It is often set by the developer, supported by marketing, commissions and incentives. That makes it difficult to know what the property is truly worth, because it has not been tested in a genuine secondary market between independent buyers and sellers.
In short, I do not think commercial property or newly constructed residential property are attractive substitutes for established investment-grade residential property. In my view, investors need to be very careful not to respond to tax changes by moving into asset classes that are either overpriced, structurally inferior, or both.
Borrowing to invest in SMSF is also out now
The government has bowed to pressure from the Greens and agreed to remove the ability for SMSF to use limited recourse borrowing arrangements to invest in residential property. My understanding is that these arrangements will still be available for commercial property.
This removes yet another wealth accumulation strategy that was available to a previous generation. In my view, that places younger people at a relative disadvantage, because they have fewer strategies available to help build wealth over time.
That said, borrowing to invest in residential property inside super was never as attractive as investing outside super under the previous negative gearing rules, where losses were not quarantined. Based on my modelling, the internal rate of return from investing in property inside super is around 8.9% p.a.
That is slightly better than owning property in personal names if negative gearing is quarantined. However, it is still nowhere near as attractive as the previous tax settings for investing outside super.
So, whilst this change is a blow for investors, the attractiveness of borrowing to invest in residential property inside super was always questionable.
History suggests these tax changes may not last
The Hawke and Keating government quarantined negative gearing from July 1985 but later bowed to political pressure and reinstated it in September 1987, after the July 1987 federal election.
Whilst rents were rising in Sydney, property prices and rents were relatively stable across most markets over the two-year period between 1985 and 1987. Ultimately, it was not a dramatic collapse in housing supply or an explosion in rents that forced the policy reversal. It was the sustained political pressure from housing, construction and landlord groups that made the policy increasingly unattractive.
A similar pattern occurred in New Zealand. Interest deductibility for property investors was progressively removed from October 2021, but was later reinstated between April 2024 and April 2025, after the October 2023 general election. Again, the policy became politically unattractive. Once the political cost outweighed the perceived benefit, it was reversed.
That is the important lesson.
At the moment, it is popular to say that people are happy for property prices to fall. It can feel almost greedy, or too capitalist, to say the opposite, being that people actually want property prices to rise.
But the reality is more complicated.
Most homeowners, including many first-home buyers, probably do want property prices to rise after they have purchased. No one buys a home hoping it falls in value. They may want prices to be more affordable before they buy, but once they own, their incentives change quickly. Remember, approximately two-thirds of Australians are homeowners.
Governments also have a strong incentive for property prices to rise. A large amount of government revenue is linked, directly or indirectly, to rising property values, including stamp duty, land tax, council rates, capital gains tax and various other property-related taxes, charges and levies. Falling or stagnant property values create fiscal pressure.
Another important point is that Australia has already voted on similar tax settings. Bill Shorten took changes to negative gearing and capital gains tax to the 2016 federal election, and Labor lost. The policy was also a major feature of the 2019 election, which Labor also lost. Therefore, it is difficult to argue that there has ever been a clear electoral mandate for these changes.
Whether there is a change of government at the next federal election in 2028 may not matter all that much. If history is any guide, these tax settings are likely to become more unpopular over time. The longer the policy is in place, the more visible the unintended consequences become, and the more pressure builds from affected groups.
That does not mean the policy will necessarily be reversed immediately. But history suggests that these types of tax changes often prove to be politically fragile. They can appear attractive in theory but become much harder to defend in practice.
Expect a stalemate, not a crash or rental spiral
As for what rents and property prices might do over the next couple of years, I do not expect a dramatic change in either.
There will probably be upward pressure on rents, but I do not expect rents to spiral out of control. Similarly, I do not expect property prices to move materially in either direction.
In periods of uncertainty, most people avoid making major financial decisions. Discretionary sellers are likely to delay selling. Buyers are likely to become more cautious. And investors who already own established residential property are likely to hold onto it, rather than sell and potentially lose the benefit of existing negative gearing arrangements.
In short, I expect a stalemate between buyers and sellers. That should reduce transaction volumes and probably contribute to property prices moving sideways for a period of time.
Negative consequences of a locked-up property market
A property market that becomes locked up, with fewer transactions taking place, has wide-reaching consequences.
Many industries rely on property transactions, including conveyancers, lawyers, mortgage brokers, removalists, real estate agents and many others. When transaction volumes fall, the economic impact extends well beyond buyers and sellers.
It also reduces labour mobility. People become less willing or able to move for work, downsize, upsize or relocate to where their needs are better met.
A less active market also affects price discovery. If fewer properties are transacting, valuations become less reliable because there is less current market evidence to rely upon.
It also makes it harder for property to find its highest and best use. People may hold onto properties that no longer suit them simply because the cost or risk of transacting is too high.
Developers are affected too. They often take their cues from the sentiment and health of the established property market when deciding whether to commit capital to new projects. If the established market is weak or inactive, developers are less likely to take on the risk of building additional housing.
That is why I think these tax settings will become increasingly unpopular the longer they remain in place. The consequences are not confined to investors. They flow through to employment, mobility, housing supply, market efficiency and the broader economy.
Preserve optionality and avoid knee-jerk decisions
Of course, the natural question is: given these changes, what should investors do, and how much should they change their investment strategy?
As noted above, I would not recommend investing in commercial property or newly constructed residential property. In my view, neither of these options are attractive.
Whilst these tax settings remain in place, they are likely to reduce investor demand for established property. However, if negative gearing benefits are eventually reinstated, it is very likely that established property prices will rise strongly thereafter, particularly if investor demand returns quickly.
Therefore, if over the next couple of years, you form the strong view that these tax benefits are likely to be reinstated, you may consider investing in established property on that basis. But I would proceed with caution. That strategy requires you to tolerate higher holding costs in the interim, accept some legislative risk, and be comfortable that the underlying property remains a high-quality long-term investment even if the tax rules do not change.
In the meantime, there are alternative strategies investors could consider.
These include borrowing to invest in the share market, accelerating the repayment of non-tax-deductible debt, making additional concessional super contributions, and/or making non-concessional super contributions.
The right mix will depend on your personal circumstances, including your age, income, tax position, borrowing capacity, risk tolerance, liquidity needs and existing asset allocation.
However, I would be careful about adopting any strategy that materially reduces your ability to borrow to invest in property in a few years’ time, assuming that was your intention before the 2026 Federal Budget. The risk is that you overreact to a tax change that later proves to be temporary, commit capital elsewhere, and then regret that decision if the tax settings are reset and the investment case for established property improves again.
In short, this is not a time for knee-jerk reactions.
The better approach is to preserve optionality. Avoid low-quality substitute investments and only redirect capital into alternative strategies where the after-tax return, risk profile and liquidity trade-offs are clearly attractive.
Tax settings matter, but they should not be the only driver of an investment decision. A good investment still needs to stand on its own merits.
