Demand-side Subsidy and Housing Market Distortion

Australia's housing affordability has decreased significantly over the recent decades. As we noticed between the early 2000s till nowadays, median prices rose by more than approximately +200 per cent, more than twice the growth in average full-time earnings over the same period (Australian Bureau of Statistics, 2022). The 2026 Federal Budget's reforms to Capital Gains Tax and negative gearing represent the most significant attempt to address the tax system's role in this intergenerational inequality in a generation.

Negative gearing allows investors to deduct net rental losses against other taxable income, including wages. The 50 per cent Capital Gains Tax discount compounds this advantage when an investor sells a property held for more than twelve months, only half the capital gain is taxable. Together these concessions function as a two-stage tax shelter that benefits higher-income earners only. Whereas A person earning $60,000 saves approximately $3,800 annually from a $20,000 property loss, while B person earning $180,000 saves $9,000 from the identical loss. The concession is therefore worth most to those who need it least, artificially inflating property prices beyond what unsubsidised owner-occupiers can maintain (Budget.gov.au, 2026).

The old regulation mechanism directly undermines the reform's stated objective, because every existing investor - precisely those who accumulated property wealth under the most favourable tax conditions in Australia's history - will retain full benefits. The intergenerational imbalance is not corrected. It is frozen in place for another twenty to thirty years to be fixed.

Australia's superannuation system holds approximately $3.9 trillion in assets accumulated predominantly by older Australians. Self-Managed Super Funds [SMSF] retain their 33 per cent CGT discount, entirely untouched. If the objective is intergenerational equity, leaving the wealthiest generation's largest tax protection layer completely intact is a direct logical contradiction of the reform's own rationale.

The supply-side mechanism assumes investors will shift toward new construction. In a high interest rate, high construction cost environment, exit from the property market is equally rational. If investors leave rather than redirect, rental supply falls, rents rise, and those the reform was designed to help are left worse off.

The 2026 reforms move in the right direction but fall short of their stated ambition. Grandfathering protects the generation the reform was designed to rebalance. The largest tax shelter for older Australians remains untouched. The supply mechanism is unproven.

References

Budget.gov.au. (2026b). Budget 2026-27. [online] Available at: https://budget.gov.au/content/04-tax-reform.htm.

Australian Bureau of Statistics (2022). Housing Occupancy and Costs, July 2017 - June 2018 | Australian Bureau of Statistics. [online] www.abs.gov.au. Available at:

https://www.abs.gov.au/statistics/people/housing/housing-occupancy-and-costs/latest- release.