The 30% rent increase figure making headlines this week traces back to specific assumptions about investor behaviour that don’t match what happened when similar policies were tested in the past. The number comes from modelling commissioned by property groups opposing Labor’s proposed changes to negative gearing and capital gains tax concessions, but the analysts who produced it say their work has been stripped of crucial context.
The core claim is this: if negative gearing is restricted and the capital gains tax discount drops from 50% to 25%, property investors will sell up in large numbers, rental supply will collapse, and rents will spike by as much as 30% in some markets. The problem is each step in that chain requires specific conditions to hold, and the historical evidence suggests they won’t all align.
What the modelling actually says
The analysis that produced the 30% figure ran three scenarios based on different rates of investor exit. The worst-case scenario assumes 30% of property investors sell within two years of the policy starting and are not replaced by new landlords or build-to-rent operators. That’s the path to a 30% rent increase in high-demand markets like inner Sydney and Melbourne.
The base case, which the analysts flagged as more realistic, assumes a 15% investor exit over the same period with partial replacement by institutional landlords. That scenario produces rent increases in the 8-12% range over two years, not 30%. The third scenario, which factors in a supply response from purpose-built rental developments, shows rent increases of 3-6%.
The 30% number only works if you assume the policy kills investor appetite entirely, no new supply comes online to fill the gap, and renters have no ability to move or adjust. None of those assumptions held when negative gearing was briefly removed in the mid-1980s. Rents rose in Sydney and Perth, but the national picture was mixed, and the increase reversed when the economy cooled.
Why investors don’t all move at once
Property investors are not a homogeneous group making identical decisions on the same timeline. Some hold negatively geared properties as a long-term wealth-building strategy and can absorb a tax hit. Others own properties outright or with small loans, so negative gearing changes don’t affect them. A third group, particularly those with high loan-to-value ratios and tight cashflows, will feel immediate pressure.
The policy also includes a $10,000 annual cap on deductions rather than a full removal, and it grandfathers existing investments. That means current landlords can keep their tax treatment if they don’t sell. The incentive to exit only applies to new purchases or investors who were already marginal.
Historical data from the 1985-87 period shows investor selling activity increased, but not by 30% in two years. CoreLogic’s transaction records from that period show a modest uptick in investor sales, clustered in markets where prices had already run hard. The bigger driver of rental tightness in Sydney at the time was a separate issue: a freeze on public housing construction and a spike in immigration that wasn’t matched by private development.
The supply side of the equation
The 30% scenario assumes rental supply is fixed and can only shrink. That ignores the build-to-rent sector, which has grown from near-zero to over 30,000 units under construction in the past five years. Institutional landlords pay company tax rates, not individual marginal rates, so they’re less sensitive to negative gearing changes. If small landlords exit and rents rise, those projects become more viable, not less.
The modelling also doesn’t account for regional variation. Markets with strong construction pipelines and low vacancy rates will behave differently to markets where supply is constrained by planning rules or land scarcity. Sydney’s inner ring might see sustained rent pressure, but regional centres with rising vacancy rates and oversupply in the apartment sector are unlikely to follow the same path.
Another variable: renters are not passive. If rents jump sharply in one area, demand shifts to neighbouring suburbs, shared housing increases, or people delay moving out of the family home. Those behavioural adjustments dampen rent spikes in the real world, but they don’t appear in static models.
Key risks that could still push rents higher
The policy could still drive rent increases if three conditions align. First, if the changes coincide with a sharp drop in interest rates that pulls buyers back into the market, investor competition for stock could dry up faster than anticipated. Second, if migration stays elevated and new housing completions fall short of the government’s 1.2 million homes target, rental demand will outpace supply regardless of tax settings. Third, if state governments don’t relax planning rules or release land quickly enough, the build-to-rent sector won’t scale fast enough to replace exiting small landlords.
The timing matters too. If the policy is introduced during a period of rising unemployment or falling wages, renters will have less ability to absorb rent increases, and the social cost of the policy will be higher even if the percentage increase is moderate.
Key numbers
- 30% rent increase: worst-case scenario assumes 30% of investors exit within two years with no replacement supply
- 8-12% increase: base case scenario with 15% investor exit and partial institutional replacement
- 3-6% increase: scenario including build-to-rent supply response
- $10,000: annual cap on negative gearing deductions under the proposed policy, not a full removal
- 30,000+ build-to-rent units currently under construction in Australia
Where the evidence points
The gap between the 30% headline and the more plausible 8-12% base case comes down to assumptions about investor behaviour and supply response. The extreme scenario requires a mass exit with no offsetting forces, which didn’t happen the last time this policy was tested and doesn’t match how investors actually behave when tax settings change gradually with grandfathering provisions.
Rent increases are likely in specific markets where supply is already tight and investor concentration is high, but a uniform national spike of 30% requires conditions that are historically implausible. The risk is not zero, particularly if the policy coincides with other shocks to the rental market, but it’s not the base case.
For investors holding negatively geared properties, the decision tree is simple: if your cashflow is already tight and you can’t absorb a $3,000-5,000 annual tax increase, start modelling your exit now. If you’re holding for long-term capital growth and can cover the shortfall, the policy changes the return profile but doesn’t eliminate the strategy. For renters in high-demand markets, the next 12-18 months will show whether the build-to-rent pipeline scales quickly enough to offset any investor pullback.
Readers tracking this policy can check whether their market fits the high-risk profile: low vacancy, high investor ownership share, constrained supply pipeline. If all three apply, rent increases above the national average are plausible regardless of the policy. If only one or two apply, the policy might accelerate an existing trend but won’t create a new crisis on its own.
Sydney’s negative gearing rental impact shows what localised pressure looks like, and investors are already finding workarounds that soften the policy’s bite. The question is not whether rents will rise, but by how much and in which markets. Subscribe to Australian Property Review to track the data as the policy moves through parliament.
General info, not financial advice.
