Canberra’s negative gearing and capital gains overhaul was sold as a lifeline for first-home buyers. Six weeks after it became law, falling prices and a 20% slump in mortgage applications have made the lenders the earliest casualty.
On August 10, Westpac Banking Corp gave the market a number that summed up the mood in Australian housing. New mortgage applications were running 20% below the previous quarter, twice the drop the bank had recorded in the weeks straight after the May budget. The lender also told investors that credit growth for housing investors would more or less halve next year, from 9.1% in 2026 to about 4.5% in 2027.
Westpac shares fell as much as 5.9% on the day, the bank’s worst session since April 2025. Commonwealth Bank of Australia, National Australia Bank and ANZ all dropped more than 2% alongside.
None of this was supposed to be the story. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 was framed as a housing affordability measure, a way of tilting the market back towards people trying to buy their first home rather than people buying their fourth.
Six weeks after it cleared parliament, the clearest evidence of its bite is not in the hands of first-home buyers. It is in the loan books of the four institutions that sit at the centre of almost every property transaction in the country.
What the law actually does
The package was announced in the 2026-27 federal budget on May 12, introduced in the House of Representatives on May 28, and passed both chambers on June 25 after a short and bad-tempered committee process.
The Greens sided with the government in the Senate to block a Coalition attempt to delay the vote.
The lower house passed the amended bill 98 votes to 39. It was enacted the following day. Under a month from introduction to law is fast by any standard, and the speed is part of why the reform is still being argued about.
Two changes matter most, and both start on July 1 2027.
The first restricts negative gearing on residential property to new builds. Negative gearing lets an investor deduct the shortfall between rental income and costs, mostly loan interest, against their other income, including wages. From July 2027, investors who bought an established dwelling after 7.30 pm AEST on May 12, 2026 will no longer be able to do that.
Losses on those properties are quarantined instead. They can be carried forward and offset against residential rental income or against future capital gains on rental property, but not against salary in the year they occur.
Grandfathering is generous. Anyone holding a property at budget night, including buyers who had exchanged contracts but not yet settled, keeps the existing treatment until they sell. Eligible new builds keep both negative gearing and the 50% capital gains discount.
Build-to-rent projects, properties in widely held trusts and superannuation funds, and private investment supporting government housing programmes are all carved out.
The second change is broader and reaches far beyond housing. For capital gains events on or after July 1, 2027, the 50% CGT discount for individuals, trusts and partnerships is replaced by cost base indexation using the consumer price index, so that only real gains are taxed, together with a new minimum tax rate of 30% on capital gains.
The change applies prospectively, to gains accruing after the start date, with taxpayers establishing a value for their assets as on that day. It also ends the pre-CGT shelter that has protected assets acquired before September 20, 1985 for four decades.
Late amendments softened some edges. The turnover threshold for the small business 50% active asset reduction was lifted from AUSD 2 million to AUSD 10 million, deductible gifts and donations now reduce gains caught by the 30% minimum, and some ministerial instrument-making powers were trimmed.
On June 18, the government also flagged an Innovative Business CGT Concession for founders, employee share scheme participants, and early-stage investors, after complaints that the regime punished people who had built companies from a low-cost base.
Why the backlash has been so fierce
The first is political. Prime Minister Anthony Albanese ruled out touching negative gearing and the capital gains discount repeatedly during the 2025 election campaign. Legislating both inside the following parliamentary term, and doing it in five weeks, handed the opposition a straightforward argument about mandate and trust.
It is the second significant tax reversal in eight months, after the government’s retreat on superannuation late last year. The government’s answer is that the problem could not be deferred any longer. That may be true, and it does not settle the question of whether voters were told.
The second is about rents. Australia’s rental market entered this reform with almost no slack. Vacancy is running near 1.6% nationally and advertised rents are climbing close to 6% a year.
Critics argue that discouraging investors from buying established homes does not remove a single dwelling from the country, but it does change who owns it, and a first-home buyer moving into a house that was previously tenanted takes one rental off the market while removing one household from the queue. The offsetting effect is real but slow, and the timing gap falls on renters.
The third is about who gets caught. The quarantining rule is blunt in a way that works against small investors. An investor with a single leveraged property and no other rental income has nothing to offset the loss against, so the deduction sits unused for years.
An investor with a portfolio can absorb the loss against rent from other holdings almost immediately. Around two-thirds of Australia’s landlords own one property. The reform, aimed at speculation, lands hardest on the smallest participants and on people who were about to become landlords for the first time.
Complexity is the quieter complaint. Advisers point out that almost every resident individual and trust holding a capital asset now needs a defensible valuation as on July 1, 2027, that succession and exit planning has to be reworked, and that the loss of pre-CGT status will surface in family businesses and farms that have nothing to do with housing.
The experts do not agree, and that matters
The construction and property lobby moved early. Modelling by Qaive and Tulipwood Economics, commissioned jointly by the Housing Industry Association, Master Builders Australia, the Property Council of Australia and the Real Estate Institute of Australia, tested several versions of the reform and found housing starts falling in everyone.
The harshest scenario, removing negative gearing except for one property per investor, produced 45,500 fewer dwelling starts over the five years to 2029-30, a AUSD 3.1 billion hit to GDP in net present value terms, and about 4,250 fewer construction jobs a year. The version closest to what parliament passed, restricting the concession to new construction while grandfathering existing holdings, pushed rents up by almost 1% a year above the baseline.
HIA managing director Jocelyn Martin’s argument is simple enough to fit on a placard, that taxing property more heavily produces fewer homes. Master Builders chief executive Denita Wawn called the findings unequivocal.
The Grattan Institute reaches a very different conclusion from the same starting point, projecting national price falls of one to two percent with limited rental disruption, on the reasoning that the tax concessions mostly inflate the price of existing stock rather than fund new supply.
Reserve Bank and Australian Bureau of Statistics data give that view some support, since the overwhelming majority of investor lending has historically gone to established dwellings rather than new construction. A Senate committee inquiry in March recommended cutting the discount for much the same reason, arguing the settings distorted the market in favour of investors over owner-occupiers.
Both camps are arguing honestly, and the honest read is that the outcome depends almost entirely on design. Whether the new build exemption is workable, and how the term is defined in the regulations still to come, will decide whether investor money rotates into construction or simply leaves housing.
A market already turning
The reform arrived into a downturn it did not cause but has clearly sharpened.
Cotality’s national Home Value Index fell 0.4% in June, the third consecutive monthly decline, and the largest since December 2022. July was worse at 0.7%, and the weakness stopped being a Sydney and Melbourne problem. Sydney values fell 1.4% over the month and Melbourne 1.2%, with Melbourne having peaked in November and Sydney in January. Brisbane fell 0.6% and Adelaide 0.2%, second consecutive monthly declines for both after revisions.
Perth is the case that best illustrates how quickly the ground has shifted. The city was recording monthly gains above 3% as recently as November, and is still up more than 20% year-on-year. It posted a nominal 0.1% rise in July, but only after Cotality revised its June figure from a 0.7% gain to a 0.5% fall, leaving the quarter negative, and PropTrack has the city declining outright. Flat is the fair description of a market that was the country’s engine room a few months ago.
The composition of the fall is revealing. Over the three months to July, upper-quartile values fell 3.2% nationally while lower-quartile values edged up 0.3%. Expensive stock is bearing the correction, partly because higher borrowing costs bite hardest on large loans, partly because first-home buyer schemes support demand below the median, and partly because investors selling ahead of the 2027 start date are concentrated in premium property.
The wider backdrop is unforgiving. The cash rate sits at 4.35% after 75 basis points of increases this year, consumer sentiment is deeply negative, capital city sales volumes are running 16.2% below a year ago, and auction clearance rates have been under 50% since late May, the weakest in six years.
Investor mortgage rates average about 6.4% against a gross yield of 3.5%, which makes leveraged residential investment hard to justify on income alone even before the tax change lands. Most economists now expect the first rate cut around the middle of 2027, not this year.
Forecasters have adjusted accordingly. CBA cut its December 2026 price growth forecast to 3% from 5%, citing the negative gearing changes and expecting the sharpest impact in apartments and cheaper stock where investors cluster.
Westpac IQ now expects prices to finish the calendar year flat nationally. Domain sees Sydney and Melbourne house prices falling over the year to June 2027 while Perth, Adelaide and Brisbane reach fresh records, a divergence that is arguably the real story of this cycle.
Why this lands on the banks
Mortgages account for roughly 60% of the big four’s combined credit books, against 40% to 50% at global peers, and that share has grown as the banks retreated from wealth management, advice and offshore assets. The four control more than 70% of the national mortgage market, with CBA alone holding about a quarter of home lending. Foreign investors now own somewhere between a quarter and a third of the majors, drawn by the same qualities that made the sector a domestic staple, reliable fully franked dividends underwritten by rising property values and benign credit losses.
The banks touch every stage of a transaction. They set serviceability buffers that determine what a buyer can bid. They commission the valuations that decide whether a deal settles at the agreed price. They price investor loans above owner-occupier loans and earn more on them.
They fund the broker channel that originates most new lending, sell lenders mortgage insurance on high loan-to-value deals, and securitise the resulting book. Crucially, serviceability assessments for investors have long incorporated the tax benefit of negative gearing. Strip that out for established dwellings and the same borrower qualifies for a smaller loan, which reduces both volume and average loan size at once.
That is precisely what the numbers now show. Westpac’s applications are down 20%, with investor applications down about 26% and owner-occupier applications down 18%, according to Morningstar’s read of the update, which suggests rate rises are doing as much damage as the tax change.
NAB reported applications down about 15% over the June quarter with application values off 9%, attributing part of it to uncertainty over the reform. Westpac’s third-quarter cash earnings came in at AUSD 1.8 billion with stable margins and 2% loan growth, respectable numbers that the market ignored in favour of the forward guidance.
Analysts are now questioning the sector’s core promise. Jarden’s Matthew Wilson describes a difficult earnings environment built on weaker volumes, margin pressure and longer-run credit quality concerns, and his team has flagged a separate problem.
Average mortgage risk weights across the majors have climbed to about 23%, from 14% in 2014, meaning the same loan book consumes materially more capital. Payout ratios set when home lending was growing faster than corporate lending start to look stretched.
Jarden holds sell ratings on CBA, NAB and Westpac, and prefers ANZ. Morningstar forecasts fiscal 2027 home loan growth of just 2.5%, well below Westpac’s own 4.7%, and considers Westpac shares roughly 20% overvalued on a forward multiple above 17 times.
The market has been moving that way for months. Between late February and late May, NAB fell 23%, Westpac nearly 14.5%, ANZ 11.2% and CBA 5.6%, making them the worst performers among Asian bank stocks. Several majors have already begun job cuts, offshoring and automation programmes, moves analysts expect to accelerate if revenue growth stays weak. Argo Investments senior investment officer Andy Forster captured the consensus, that dividends can probably be defended but are unlikely to grow.
What to watch
Nothing in the law takes effect for another eleven months, and that gap is the immediate risk. Investors selling ahead of the start date add listings into a falling market, while buyers wait for regulations that will define what counts as a new build. Both behaviours depress prices in the interim, regardless of where the reform settles in the long run.
For the banks, the pressure is measurable and already booked into forecasts. For renters, the squeeze arrives before any relief. For first-home buyers, whose interests justified the whole exercise, the benefit depends on whether cheaper established housing arrives faster than the rental market tightens around them. Canberra has made a structural bet on the answer. The transmission is running through the banking system first.