Tax reforms eclipse interest rates as top house price drag: API

While interest rate expectations remain the leading source of downward pressure across commercial, industrial, and agricultural sectors, this marks the first time rate expectations have been knocked off the top spot in the residential market.

Industry sentiment has recorded a sharp contraction as a result. The headline API Property Market Outlook Index dropped for a third consecutive quarter to 5.1, led by residential sentiment falling from 6.0 to 5.0 on a 10-point scale.

Although the tax changes do not come into effect until 1 July 2027, property professionals indicated that market pricing is already adjusting to the incoming rules. The policy framework will replace the standard 50 per cent CGT discount with an inflation-adjusted model subject to a 30 per cent floor, while restricting negative gearing strictly to new residential builds. Established properties purchased before 12 May 2026 will remain grandfathered under previous rules.

Industry professionals remain divided on whether the reforms will achieve the government’s goals of boosting housing supply or helping prospective home buyers. Only 46 per cent of respondents expect the CGT changes to improve buyer affordability, while 48 per cent believe negative gearing reforms will assist buyers.

Regarding housing supply, 34 per cent of respondents expect the CGT changes to reduce new dwelling construction past July 2027, compared to 23 per cent who expect an increase. For negative gearing changes, 31 per cent anticipate a drop in supply, versus 28 per cent who expect a rise.

In contrast, a clear majority expects negative outcomes for tenants, with 62 per cent indicating CGT changes and 63 per cent indicating negative gearing reforms will make housing less affordable for renters.

Underlying structural factors continue to exert upward pressure on home values, led by a lack of housing supply (82 per cent), land scarcity (73 per cent), population growth (70 per cent), and high construction costs (63 per cent).

Geographically, overall market sentiment dropped across all jurisdictions, pushing Victoria (4.1) and NSW (4.4) below the neutral 5.0 benchmark. Queensland (6.6) and Western Australia (6.4) recorded the highest overall optimism, while Western Australia and South Australia (5.6) saw the sharpest quarterly declines. Tasmania held at 5.8.

Across non-residential sectors, industrial property remained the most resilient asset class at 6.4, backed by limited stock (61 per cent) and zoned land constraints (55 per cent). Agriculture held steady at 5.8, while retail (4.9) and office (4.6) lingered below neutral due to soft consumer confidence and weakening economic conditions.

“Since Budget night there has been no shortage of opinion about what these reforms will do. This is the first time the professionals who value residential property for a living have been surveyed on it, and their message is clear: the market is pricing these reforms now, more than a year before they begin,” Sherman Chan, chief economist at the Australian Property Institute, said.

“The reforms were introduced to support first home buyers and stimulate new housing supply. The professionals closest to the market are not convinced the supply will materialise, but they are convinced that renters will be worse off.

“The residential market is now caught between two opposing forces. The structural undersupply that has driven prices for years is still there. What has changed is that tax policy is now pulling just as hard in the other direction, and sentiment has fallen from the strongest of any sector to neutral in nine months.

“There was no consensus that home buyers will be better off under the reforms, but there was consensus that renters will be worse off. That is a significant finding for policymakers, because renters are the group with the least capacity to absorb higher housing costs.”

Investor dynamics and borrowing capacity

Beyond broader market sentiment, frontline lending assessment changes are already redirecting investor activity across the mortgage market.

Major lenders – including ANZ, Commonwealth Bank, NAB, and Macquarie Bank – have adjusted how they assess negative gearing tax benefits in serviceability calculations. For certain borrowers, these tighter assessment buffers have reduced maximum borrowing capacity for established dwellings by up to 20 per cent.

Rather than exiting property entirely, investors are recalibrating their strategy toward entry-level stock and higher-yielding assets requiring lower debt burdens.

Market figures from Cotality highlight the current cash flow squeeze: nationwide capital city gross rental yields averaged 3.5 per cent in June 2026, while average variable rates for new investor loans sat at 6.4 per cent – leaving most established property investments negatively geared.

With capital city units yielding an average of 4.5 per cent (at a median price of $766,499) compared to 3.2 per cent for detached houses (at a median price of $1,166,551), investor demand is increasingly gravitating toward lower price points. Only 0.8 per cent of suburbs nationwide currently offer positive cash flow potential under a standard 20 per cent deposit scenario, intensifying buyer competition in lower price brackets historically dominated by first home buyers.

“Most people assume investors will simply leave the market if negative gearing becomes less attractive,” Alex Veljancevski, mortgage broker and founder at Eventus Financial, said. “In reality, many won’t stop investing. We’ve already started seeing investors simply lower their budgets. That means investors who may previously have been looking at a $1.2 million or $1.5 million property are now looking at homes in the same price range as first home buyers.

“For some investors, borrowing capacity has fallen by around 20 per cent. That doesn’t necessarily mean they stop investing. It means they adjust where they buy.

“Lower-priced properties generally require less debt, attract lower holding costs and often deliver stronger rental yields. That combination means investors become less reliant on tax deductions to make an investment financially viable, which is exactly what many are looking for after the Budget changes.

“In today’s interest rate environment, investors are looking much more closely at cash flow than they were a few years ago.

“When borrowing capacity is tighter, lower purchase prices combined with stronger rental returns become much more attractive because they’re less reliant on negative gearing. Ironically, policies designed to reduce the attractiveness of negative gearing may actually be increasing the attractiveness of lower-priced investment properties. That’s why we’re seeing investors reassess not whether they invest, but what they invest in.

“First home buyers have always competed with investors. The concern is that investors who previously had the capacity to buy further up the market are now moving into the same price brackets.

“For first home buyers, affordability has never been solely about saving a deposit. It’s also about competing against buyers with greater experience, existing equity and established investment strategies. If more investors are redirected into the lower end of the market, that competition only becomes more intense.

“Improving affordability isn’t just about changing investor behaviour. It’s about increasing the number of homes available. But that won’t happen overnight.

“The success of these reforms shouldn’t just be measured by whether investor demand falls. It should also be measured by where that demand ends up. We’re not suggesting investors weren’t already competing with first home buyers. The concern is that investors who previously had the capacity to buy further up the market are now being pushed into the same price brackets. If that’s what happens, we’ve redistributed competition rather than reduced it.”

[Related: Mortgage demand ‘hits a wall’ as downturn gathers pace]