Negative gearing new builds are becoming the next pressure point in Australia’s housing debate.
The federal government’s tax reform was designed to move investors away from established homes and towards properties that add to housing supply. The logic is straightforward. Investors buying an existing property compete for a home that is already there. Investors funding a new dwelling may help another home get built.
But housing policy rarely produces only one response.
As investors reconsider established properties, many are likely to look at new apartments, townhouses and house-and-land packages. That puts them into direct competition with first-home buyers in some of Australia’s most price-sensitive estates and growth corridors.
The reform may make established homes easier for some first-home buyers to purchase. It could also make new homes harder.
The tax rule has moved the buyer queue
From 1 July 2027, residential property investors will generally only be able to offset rental losses against salary and other non-property income when the investment is an eligible new build.
Properties held before 7.30 pm AEST on 12 May 2026 are protected under the grandfathering arrangements.
Investors who acquired an affected established property after that deadline will still be able to deduct losses against other residential property income, including relevant capital gains. Excess losses can also be carried forward. What they cannot do is use those losses to reduce tax on wages or other non-residential income. The reforms have passed Parliament and are now law. (Treasury)
That distinction changes the after-tax calculation.
An investor comparing two otherwise similar properties may now find that a new dwelling produces a more manageable cashflow outcome, even where the purchase price or gross rental yield is less attractive.
What has not changed is the underlying property.
A poorly located townhouse does not become a strong investment because it is new. A small apartment surrounded by future competing supply does not gain better resale demand because it comes with a tax deduction.
The tax treatment can change the holding cost. It cannot create tenant demand, scarce land or long-term buyer appeal.
Quick take
The reforms may reduce investor competition for established homes while increasing it in new estates. First-home buyers could gain in one part of the market and lose ground in another.
Negative gearing new builds change the cashflow equation
The weekly cost difference between a new and established investment property cannot be reduced to one national figure.
It depends on the purchase price, deposit, interest rate, rent, ownership costs, marginal tax rate and the building’s depreciation profile. A comparison based on a highly leveraged Sydney house will look very different from one based on a lower-priced townhouse in Adelaide or Perth.
The mechanics, however, are clear.
When rental income does not cover interest and eligible property expenses, the investment produces a taxable loss. Under the new rules, an eligible new build can continue to use that loss against income such as wages. An affected established property generally cannot.
Newer properties may also offer larger capital works and depreciating-asset deductions. The Australian Taxation Office says qualifying construction costs are generally claimed over 40 years, while eligible new depreciating assets may also produce deductions over their effective lives. The actual benefit depends on the property and the investor’s circumstances. (Australian Taxation Office)
This does not mean investors receive the entire loss back.
A tax deduction reduces taxable income. It does not reimburse every dollar spent. An investor still has to fund the mortgage shortfall, rates, insurance, management fees, maintenance and unexpected costs.
Here’s the catch. The stronger the marketing focus on tax savings, the more carefully the underlying asset should be checked.
Australian Property Review previously examined this risk in Negative gearing shake-up sends investors into new apartments. The practical test remains the same: would the property still make sense if the tax benefit were smaller than expected?
Why first-home buyer estates are exposed
First-home buyers and investors do not always shop in separate markets.
They frequently overlap in lower-priced new apartment projects, townhouse developments and house-and-land estates. These are the properties most likely to sit within government scheme limits and within the borrowing capacity of buyers who cannot afford established homes closer to major employment centres.
The Australian Government’s expanded 5% Deposit Scheme can be used for an existing home or a new build. It currently offers unlimited places, has no income caps and allows eligible first-home buyers to purchase with a minimum 5 per cent deposit without paying lenders mortgage insurance. (Housing Australia)
That lowers the deposit hurdle.
It does not reserve new housing for owner-occupiers.
An investor and a first-home buyer may therefore pursue the same townhouse, but assess it through different financial lenses.
The first-home buyer is asking whether the repayments, commute and household budget are manageable.
The investor is calculating rent, deductions, depreciation, vacancy risk and long-term resale value.
The investor does not automatically have more money or borrowing capacity. But the tax treatment may allow some investors to tolerate a larger initial cashflow loss than they would accept on an established property.
This matters most when a development has limited stock in its cheapest price band. A relatively small increase in investor demand can absorb the homes that first-home buyers were most likely to afford.
Australian Property Review has already covered how buyer assistance can flow into prices when supply does not respond quickly in The 5% deposit trap pushing first-home prices even higher.
The same demand problem may now arrive from the investor side.
The supply argument is real, but it works slowly
There is a credible case for directing investor support towards new housing.
Apartment developers often need a minimum number of pre-sales before lenders will fund construction. House-and-land projects also depend on reliable buyer demand before land, infrastructure and building activity can progress.
More investors buying new dwellings could improve project feasibility and help turn proposed developments into completed homes.
That is the upside case.
The timing is the problem.
Investor demand can shift within weeks. Housing supply can take years.
A project must move through land acquisition, zoning, planning, finance, pre-sales, construction and completion. A dwelling approval is better than no approval, but it is not a finished home.
Australian Property Review’s analysis of Australia’s uneven dwelling approvals recovery found that even strong monthly approval figures can hide a fragile pipeline. Financing costs, construction capacity, labour availability and project feasibility still determine whether approved homes are actually delivered.
The reforms could therefore produce an awkward transition.
Demand may increase in selected new-build markets before the additional supply supported by that demand reaches completion. During that gap, prices may rise and first-home buyer choice may narrow.
The policy could work over several years and still create affordability pressure in its first phase.
Credit policy may accelerate the shift
Tax treatment changes what an investor wants to buy. Lending policy determines what they can buy.
After the Budget announcement, some lenders began changing how future negative gearing benefits were treated in investor serviceability assessments. Broker case studies reported large reductions in borrowing capacity for individual buyers considering affected established properties. Those cases should not be treated as a national average, but they show how quickly credit settings can reinforce a policy shift. (Yahoo Finance)
Consider the practical effect.
An investor may still prefer an established house with stronger land value and resale demand. But if the lender assesses the property without the previous tax benefit, the investor may no longer qualify for the required loan.
The same borrower might qualify for a different amount when buying an eligible new property.
That creates two incentives at once:
- the new build may have better after-tax cashflow
- the lender may recognise a stronger serviceability position
This does not mean every bank will apply identical calculations. Lending policies can differ, and they can change again before the reforms commence.
It does mean investors should obtain an updated borrowing assessment before comparing properties. A pre-approval based on earlier rules may no longer reflect what a lender is prepared to provide.
The SMSF change closes another route
The government has also moved to prevent future limited recourse borrowing arrangements from being used by superannuation funds to purchase residential property.
Existing arrangements are protected, with a transition period for transactions that were already underway. The government says SMSF borrowing represents less than 1 per cent of total residential property borrowing and less than half a per cent of new residential borrowing each year. (Treasury Ministers)
That means the SMSF change is unlikely to transform national prices by itself.
Its behavioural effect may still matter.
Investors who had been considering residential property through super may now reassess personal ownership, commercial property, shares, renovations or debt reduction. Others may focus more heavily on eligible new builds outside super.
The second-order effect is not simply that one investment channel closes. It is that capital searches for another route.
What could slow the investor shift
A rush into new builds is possible. It is not inevitable.
First, new properties often carry a price premium. Developers must recover land, construction, finance, marketing and delivery costs. The tax benefit may not compensate for paying too much at the start.
Second, investors face settlement risk. A property purchased off the plan may be valued below the contract price when it is completed, leaving the buyer to contribute more cash.
Third, large estates and apartment projects can produce concentrated rental competition. Tenants may have dozens of similar properties to choose from at the same time.
Fourth, construction delays can leave investors committed to a property that will not produce rent for longer than expected.
Finally, the investor must confirm that the property meets the legal definition of an eligible new build. Marketing language should not be treated as tax advice.
The base case is therefore a split market rather than a uniform investor surge.
Well-located projects with limited competing supply, realistic prices and strong rental demand may attract more buyers. Projects relying mainly on depreciation schedules and tax-led sales pitches may struggle once purchasers examine the full numbers.
First-home buyers need to compare both sides of the road
First-home buyers in a new estate should not assume the display-home price represents the whole market.
Compare the new property with established homes in surrounding suburbs. Check the land size, build quality, transport, future development stages and how many similar dwellings may be released.
Developer incentives also need scrutiny.
A rebate, appliance package or paid body corporate period may reduce upfront costs, but it can also hide a higher contract price. That matters if the bank valuation comes in below the amount agreed with the developer.
The useful question is not simply, “Can I buy this with a 5 per cent deposit?”
It is, “Would I still choose this property without the scheme, incentive or fear of missing the current release?”
If the answer is no, the buyer may be reacting to the sales process rather than the asset.
Investors should test the property without the tax benefit
For investors, the practical next step is to model the property in three ways.
Start with the expected case, using realistic rent, interest, vacancy and ownership costs.
Then remove the negative gearing benefit and test whether the household can still carry the property if eligibility, income or tax settings change.
Finally, model a downside case with a construction delay, lower valuation, weaker rent and no capital growth during the first few years.
A simple rule of thumb applies: the property should not need perfect conditions to remain manageable.
The best result for the policy would be more investors funding genuinely useful housing, more projects reaching completion and more rental stock entering undersupplied markets.
The weaker result would be investors bidding up limited new stock while construction constraints remain unchanged.
Australia will probably see both outcomes, depending on the project and location.
Start here: pressure-test the property on its own merits before allowing a tax rule, deposit scheme or developer incentive to make the decision.
Subscribe to the free Australian Property Review newsletter for independent analysis of property policy, credit and housing supply.
