The government’s argument for cutting the capital gains tax discount has a logic to it.
Investors who can claim a 50 per cent discount on capital gains have a structural tax advantage over owner-occupiers. Combined with negative gearing, they can deduct property losses against wage income during the hold period and then pay tax on only half their gain when they sell. For a high-income earner, the after-tax maths of holding investment property looks very different to the maths for a first home buyer trying to save a deposit.
The Senate Economics References Committee put it plainly in its March 2026 report: the design of the CGT discount, combined with negative gearing, has skewed housing ownership away from owner-occupiers and toward investors.
The government says changing that equation is about intergenerational fairness. And at the level of first principles, the argument is not wrong.
But there is a question the policy debate is not fully answering. And it is the one builders who work on apartments, townhouses, and medium-density projects should be asking right now.
If investor demand softens because the after-tax returns on property deteriorate, what happens to the new housing pipeline?
How Investor Finance Actually Works in New Construction
To understand the risk, it helps to understand the mechanism.
Apartment and medium-density developments in Australia do not typically get built on speculation. They get built when a developer can demonstrate sufficient pre-sales to satisfy a construction lender. Banks and non-bank lenders use pre-sale thresholds, commonly 80 to 100 per cent of the debt, as the evidence that a project stacks up before they advance funds.
Those pre-sales come predominantly from investors. Not exclusively, but predominantly. Owner-occupiers do buy off the plan, but investor buyers are the engine that moves the pre-sale dial fast enough for projects to proceed.
This is not a fringe arrangement. It is how the bulk of Australian apartment construction has been financed for decades.
When investor appetite softens, the pipeline does not collapse immediately. It slows. Projects that would have reached pre-sale thresholds in six months take twelve. Some do not proceed at all. Builders who were expecting to be on site find themselves waiting. Trades who were lined up look elsewhere.
That is the mechanism the industry is worried about. Not a crash. A slow, structural squeeze on new supply at exactly the moment the government is trying to build more homes.
What the Modelling Actually Says
Independent economic modelling commissioned by the Housing Industry Association and undertaken by Qaive and Tulipwood Economics examined a range of scenarios in detail.
The headline figures are significant.
Removing the CGT discount with minimal grandfathering would reduce housing supply by approximately 33,000 dwellings over five years, cost more than 3,000 construction jobs, and reduce GDP by $3 billion. Removing negative gearing under similar conditions would produce 45,500 fewer dwelling starts, 4,250 fewer construction jobs per year on average, and a $3.1 billion GDP reduction. Combined, the compounding effect is larger still.
The modelling also examined a softer scenario: restricting negative gearing to new construction and grandfathering existing arrangements for current investors. Even under this approach, GDP would fall by $1.6 billion and dwelling starts would drop by approximately 22,750 over the modelling period.
HIA Managing Director Jocelyn Martin has been direct: in a housing supply crisis, with national rental vacancy rates barely above 1.1 per cent and even tighter conditions in Brisbane at 0.8 per cent, Perth at 0.6 per cent, and Adelaide at 0.8 per cent, reducing the supply of new rental homes makes the affordability problem worse, not better.
Private investors supply around nine in ten rental homes across Australia. The majority are small-scale landlords, not sophisticated portfolio operators. Changing their after-tax position changes supply.
The Counter-Argument, Honestly Put
There are credible economists who reach different conclusions, and it is worth engaging with their analysis seriously.
The Grattan Institute’s modelling suggests that combined negative gearing and CGT changes would reduce property prices by one to two per cent nationally, a modest cooling effect without a crash. Their view on rental market impact is also more optimistic than the HIA’s, pointing to the broader economic context rather than focusing solely on investor incentives.
Domain’s chief of research and economics, Dr Nicola Powell, has also cautioned that changes alone will not fix housing affordability. The Senate inquiry’s own report acknowledged that multiple factors influence housing markets, and that CGT and negative gearing are one lever among many.
AMP’s chief economist Shane Oliver has suggested that a modest reduction in the discount, paired with lower income tax rates, could be framed as genuine structural reform rather than a revenue grab. That framing matters politically, and it also matters for how markets respond.
None of these voices are arguing that the housing market is fine as it is. They are arguing about the best levers to pull and what the unintended consequences of each might be.
The 2019 Warning That Still Resonates
Builders with a long memory will recall 2019.
Before that year’s federal election, the then-Labor opposition went to the polls with a policy to restrict negative gearing to new properties and halve the CGT discount. The Coalition ran strongly against it on property market grounds. Labor lost.
The property market effect of that period was real. Investor sentiment softened in the lead-up to the election as uncertainty mounted. Auction clearance rates fell. Some developments slowed.
The market recovered after the Coalition’s unexpected win, and conditions rebounded sharply in subsequent years for unrelated reasons. But the 2019 episode established a pattern: property market uncertainty around tax settings has a chilling effect on investor behaviour, and that chilling effect shows up in the pipeline before any legislation passes.
In 2026, the speculation itself has been running for months. Some of that uncertainty is already being priced into decision-making. Developers and builders with projects at the pre-sales stage are already having conversations about what the budget means for their numbers.
What the New Builds Exemption Might Mean
The policy model generating the most discussion is the one that would restrict negative gearing to newly built properties only. The intent is to push investor demand toward new supply rather than established housing. In theory, this protects or even boosts the new construction pipeline.
In practice, the picture is more complicated.
First, the term new build needs careful definition. A knockdown-rebuild on an established block could qualify under a loose definition, which does not necessarily add to the net housing stock.
Second, directing negative gearing to new builds does not automatically make those new builds financially viable for investors. If construction costs, planning delays, and holding costs remain high, the after-tax return on a newly built investment property may not be attractive enough to replace the investor demand currently spread across the established market.
Third, and critically, the CGT discount is a separate question from negative gearing. Even if negative gearing is redirected to new builds, investors who sell after holding for twelve months will still face a higher tax bill if the CGT discount is cut. That affects the fundamental investment return calculation regardless of which properties are eligible for negative gearing during the hold period.
The interaction between the two reforms matters. You cannot look at one in isolation.
The Question Canberra Is Not Answering
There is a straightforward tension at the heart of this budget, and the government has not fully resolved it.
The government wants to build 1.2 million homes in five years. That target already looks ambitious given the pace of approvals, the availability of trades, and the cost of construction. Reducing investor incentives in the near term, even modestly, risks slowing the pipeline at precisely the moment it needs to accelerate.
The industry’s position is clear. The HIA and Property Council have both argued publicly that addressing structural supply barriers, planning costs, infrastructure charges, and construction productivity, should take priority over tightening investor tax settings.
Whether the government agrees will become clear on budget night.
Builders who work at the development end of the market should read the budget carefully. Not just the headline announcements, but the modelling, the transitional provisions, and the treatment of new builds under any negative gearing changes.
The answers buried in the detail will matter more to your pipeline than the press release.
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