Why Cutting Negative Gearing Could Make Australia's Housing Crisis Worse — What the HIA Modelling Shows

Here's the political pitch you've heard before: Australian housing is unaffordable because investors get too generous a tax break. Cut negative gearing. Reduce the Capital Gains Tax discount. Free up housing stock. Prices come down. Everyone wins.

It sounds logical. It's politically resonant. And according to independent economic modelling released by the Housing Industry Association (HIA) on 24 March 2026, it may be exactly the wrong solution.

The HIA's modelling — across multiple scenarios — finds that reducing access to CGT concessions or capping negative gearing doesn't just hurt investors. It suppresses new housing supply at exactly the moment when Australia can least afford it. A nation already 1.3 million homes short since 2000 doesn't solve its housing crisis by making property investment less attractive. It makes it worse — and the people who pay the price are the 30% of Australians who rent.

This is the central tension in Australia's housing policy debate right now. The government wants to improve affordability. It wants to be seen doing something about it before the election. But "something" that reduces the incentive for private investors to fund the housing that renters live in is not the same as "something that works."

This article unpacks the HIA modelling, explains both sides of the argument fairly, and tells you — clearly and practically — what the proposed changes would mean for you as an investor right now.

What Is HIA Actually Modelling and Why It Matters

Who Is the HIA and Why Their Numbers Carry Weight

The Housing Industry Association is Australia's peak body for the residential building industry — representing builders, developers, trades, and suppliers. When the HIA models housing supply impacts, they're drawing on deep industry data: construction pipelines, feasibility thresholds, investor financing behaviour, and the relationship between taxation policy and new development activity.

Critics will note that the HIA has a vested interest in policy that supports housing investment — and that's a fair point to acknowledge. Industry bodies advocate for their members. But "the HIA has an interest" is not the same as "the modelling is wrong." The methodology is independent and the economic logic is not controversial — if you reduce the post-tax return on a residential investment, at the margin, fewer investors will invest, and therefore fewer dwellings will be built or funded.

This is not the HIA's position alone. The Reserve Bank, Treasury, and numerous independent economists have made the same observation in different forms over the years: supply is the primary driver of housing affordability, and tax changes that reduce investment in new supply will, over time, worsen the supply shortage.

What the Modelling Shows — The Supply Reduction Scenarios

The HIA's March 2026 modelling runs multiple scenarios across different levels of CGT and negative gearing reform. In every scenario modelled, housing supply is reduced relative to the baseline. The scenarios range from modest reductions (reducing the CGT discount from 50% to 33%) to more aggressive reforms (removing negative gearing from existing properties or capping it to one or two investment properties).

The supply reduction is largest when both changes are applied simultaneously — which is broadly what the reform proposals on the table imply. The mechanism is straightforward: when after-tax returns fall, property becomes less attractive relative to other investments (particularly superannuation and shares). Investors who would have funded a new townhouse or apartment don't. Developers who relied on pre-sales to investors can't get projects across the line. New supply is reduced. Vacancy rates tighten further. Rents rise.

The Property Council's Response — Mike Zorbas's Argument

Property Council of Australia CEO Mike Zorbas has been direct in his response to the proposed changes: "Hiking CGT on investment in new homes, relative to shares, will hammer supply."

Zorbas's point cuts to the heart of the competitive neutrality issue. If you reduce the CGT discount specifically for property but not for shares or superannuation, you're not just changing the absolute return on property — you're changing the relative return. Investors rationally respond to relative returns. Money flows to the best risk-adjusted, after-tax return. If that becomes superannuation rather than residential property, investors don't disappear — they just take their capital elsewhere, and the rental sector loses its funding source.

With 30% of Australians renting and vacancy rates already at record lows nationally, the rental market cannot afford to lose its primary source of new supply funding.

The Two Proposed Changes Explained

CGT Discount Reduction — From 50% to 25-33% (What This Actually Means in Dollars)

Australia's current CGT framework gives individual investors a 50% discount on capital gains from assets held for more than 12 months. In practice, this means that if you sell an investment property and make a $300,000 capital gain, you only include $150,000 in your assessable income. At a 37% marginal tax rate, your CGT bill is $55,500 — not $111,000.

The proposed change reduces this discount to 25-33% (the precise level varies by proposal). Under a 25% discount on that same $300,000 gain, you'd include $225,000 in assessable income — paying approximately $83,250 in CGT rather than $55,500. That's an additional tax cost of $27,750 on a single property disposal.

Senator Pocock's specific recommendation goes further: he has proposed removing the 50% CGT discount entirely for properties purchased after 1 July 2026. Under this proposal, properties bought from that date would pay CGT on 100% of their gain — making the tax on a $300,000 gain approximately $111,000 rather than $55,500. That's a doubling of the tax cost.

Negative Gearing Cap — The 2-Property Rule Explained

The second major proposed change is a cap on negative gearing — limiting the ability to offset rental property losses against other income to a maximum of 2 investment properties. Under current law, you can negatively gear any number of investment properties, with all losses offsetting your assessable income.

Under the proposed 2-property cap:

• Your first and second investment properties would remain fully negatively gearable (losses offset income as now)
• Any third, fourth, or subsequent investment properties would not — losses would be quarantined and could only be offset against future property income

For the majority of Australian investors — who own 1 or 2 investment properties — this change would have no impact. The concern is concentrated in two groups: portfolio investors with 3+ properties, and the broader supply effect from deterring would-be investors from entering the market at all.

What's NOT Law Yet — The Important Distinction Investors Must Understand

As of March 2026, none of these changes have been legislated. This is the single most important sentence in this article for investors who are feeling panicked by the political debate.

Negative gearing works exactly as it always has. The CGT discount is 50% for properties held more than 12 months. Nothing has changed. The Senate's reform proposals, the government's budget considerations, and various think-tank recommendations are part of a political conversation — they are not law.

This matters because decisions made on the basis of proposed-but-not-legislated changes can create real costs. Selling a property prematurely to avoid a CGT change that doesn't eventuate will cost you transaction costs and potential future gains. Avoiding a good investment because of a proposed policy change that fails to pass is an opportunity cost.

Stay informed. Don't act as though legislation has passed when it hasn't.

For a deep dive into the full policy landscape, read our CGT and negative gearing policy changes guide.

The Case FOR the Changes

A balanced analysis requires acknowledging why these proposals exist. There are legitimate arguments on the reform side — not just politics.

The PBO's $247 Billion Revenue Argument

The Parliamentary Budget Office has estimated that the existing CGT 50% discount will cost the federal government $247 billion in foregone revenue over the next 10 years. That's a significant sum — roughly equivalent to the cost of multiple major infrastructure programs or years of NDIS funding.

The fiscal argument for reform is real. Governments are making choices about how to allocate a finite tax base, and the question of whether a 50% discount on investment property gains is the best use of that $247 billion is a legitimate one for policymakers to ask. The CGT discount is not means-tested, so its benefits flow disproportionately to higher-income investors with multiple properties.

The Intergenerational Equity Argument

The second argument for reform is about intergenerational fairness. The current tax settings have made it easier — through negative gearing and CGT concessions — for established investors to accumulate more property, while younger Australians struggle to buy their first home.

This argument has genuine resonance. The housing market has delivered extraordinary wealth to those who entered it early. The tax system has amplified that wealth through subsidised leverage (negative gearing) and discounted exits (CGT). Whether this is equitable is a legitimate question, and dismissing it entirely would be intellectually dishonest.

The "Mum and Dad" Investor Reality Check — 60% Better Off in Super

PEXA and LongView research adds an interesting wrinkle to the investor narrative. Their analysis suggests approximately 60% of Australia's roughly 2 million small-scale residential landlords would actually be financially better off investing in superannuation rather than investment property — when you factor in net returns after costs, vacancy, maintenance, and tax.

This finding challenges the assumption that all 2 million small landlords are rational actors optimising returns. Many are in property because of familiarity, tradition, or inertia — not because it objectively outperforms the alternatives. Reform advocates use this data to argue that a policy change might not cause the mass investor exodus that the property industry predicts.

The Case AGAINST the Changes

Supply Shock — 1.3 Million Homes Already Missing

The HIA modelling lands in the context of an already severe housing shortage. The Property Council estimates Australia is 1.3 million homes short since 2000 — a shortfall that has accumulated over decades of underbuilding relative to population growth.

Adding a policy change that, according to independent modelling, suppresses new housing supply across every scenario tested, into a market that is already 1.3 million homes short is not housing policy. It's making the problem worse faster. The demand-side interventions that create headlines don't build a single house. Only supply does.

The Victorian Warning — What Happens When You Tax Investors Heavily

Australia doesn't need to speculate about what heavy investor taxation does to housing supply. Victoria has run the experiment. The state's additional land taxes, vacant residential land tax, COVID debt levies, and rental regulation changes have collectively deterred investment in new housing.

The result? Victoria is finding it nearly impossible to meet its own target of 80,000 new homes per year — the number required to keep pace with population growth. Builders are struggling with feasibility. Investors have diverted capital to other states. And renters in Melbourne are facing tight vacancy rates despite the city's softer price performance.

The Victorian experience is a data point that reform advocates don't engage with seriously enough. Tax investor activity heavily, and investment flows elsewhere. The homes that don't get built are the homes that renters don't have.

Rents Would Rise — The 30% Who Rent Bear the Cost

Mike Zorbas's framing cuts through the political noise: 30% of Australians rent. They are the people who live in the properties that investors fund. They are the people who benefit — in the form of available housing stock — from investor participation in the market.

If investor activity is reduced through less favourable tax treatment, two things happen: fewer new rental properties are built, and some existing investors exit the market, reducing available stock. Both outcomes put upward pressure on rents. The people who can't afford to buy — the very people the policy is ostensibly designed to help — end up paying more rent in a tighter market.

This is the fundamental policy tension. You can make it more expensive for investors to be in the market, or you can keep rents affordable. Doing both simultaneously, in a supply-constrained market, is very difficult.

CBA's -0.9ppt Growth Impact by 2027

Commonwealth Bank has modelled the price impact of CGT discount changes specifically. Their estimate: a CGT discount reduction would subtract approximately -0.9 percentage points from annual price growth by end 2027. Against a base forecast of +4-5% national growth, this represents a meaningful dampening — but not a collapse.

Importantly, CBA's model also shows this dampening effect fades over time as the market adjusts. The initial shock suppresses prices as investor demand softens; but supply also reduces (fewer new builds), which tightens the market again and puts upward pressure on prices in subsequent years. The policy doesn't solve the affordability problem long-term — it potentially creates a temporary cooling and then a subsequent tightening.

For context on how CBA and other banks are modelling rate and policy impacts, see our analysis of RBA rate decisions and property investors.

What Does This Mean for Property Investors Right Now?

If You Own 1 Property — Minimal Impact, Stay the Course

For the majority of Australian investors — those with a single investment property — neither of the major proposed changes would significantly affect you. The proposed negative gearing cap applies from the third property. The CGT discount change only affects future purchases under most proposals.

Your current negative gearing deductions remain fully available. Your CGT discount on your existing property is preserved. The main risk is a policy-driven market softening if investors more broadly pull back — but as CBA notes, this is likely to be modest and temporary.

If You Own 2+ Properties — The 2-Property Cap Risk

If you own 2 investment properties, you're at the threshold of the proposed cap. Any third purchase would be subject to the quarantined-loss treatment under the proposed negative gearing cap. This changes the feasibility calculation significantly for a third property: instead of offsetting losses against your salary, losses from property three accumulate and can only be offset against future property income.

For investors planning a 3+ property portfolio, the strategy conversation needs to happen now. Options include:

• Timing: Purchase a third property before any cap is legislated, establishing it under the existing negative gearing rules (though check whether grandfathering is provided for — proposals vary)
• Structuring: Consider whether company or trust structures provide any benefit — though the CGT discount is not available to companies, making this a nuanced trade-off
• Property type: Focus on positively geared or near-neutral cash-flow properties where the negative gearing benefit is less critical

If You're About to Buy — Timing Considerations Before July 2026

Senator Pocock's recommendation of a 1 July 2026 cut-off date for the CGT discount removal creates a specific timing incentive. Under his proposal, properties purchased before 1 July 2026 would retain the 50% discount. Properties purchased after would not (at least for newly-purchased properties).

If you were planning to buy in 2026 anyway, there's a legitimate reason to bring that timing forward. But don't let a proposed policy change drive you into a bad purchase. A property that doesn't stack up fundamentally at current prices doesn't become a good investment because of CGT timing. The investment decision has to work on its own merits.

Structuring Considerations — Trust vs Personal Name

The proposed changes also raise structural questions for investors thinking about how they hold property. In a trust structure, the beneficiaries of trust distributions can potentially access the 50% CGT discount as individuals, providing some flexibility in managing the tax outcome of a future sale. Companies, by contrast, don't have access to the individual CGT discount — which means company structures are generally less attractive for properties held for capital growth.

A family discretionary trust can offer flexibility: gains can be distributed to low-income beneficiaries (including adult children or a lower-earning spouse) to minimise the effective tax rate. However, trust structures also carry complexity, cost, and stamp duty implications in some states — particularly if you're transferring existing properties.

This is an area where generic advice fails you entirely. Your specific circumstances — income, family structure, existing assets, intended investment horizon — need to be assessed by a qualified accountant with property investment experience.

For a complete guide to negative gearing under the current rules, see our negative gearing complete guide.

The Broader Housing Crisis Context

Why Supply Is the Real Problem

Australia's housing affordability crisis is fundamentally a supply problem. Demand has grown — through population increases, household formation, and migration — at a pace that Australian construction has been unable to match. The 1.3 million homes shortage the Property Council cites isn't a rhetorical device; it's an estimate of the cumulative undersupply that has pushed prices up and rents higher over two decades.

The policy solutions that actually address affordability are supply-side: releasing more land, reforming planning systems, reducing infrastructure contribution costs, training more construction workers, and — critically — maintaining the investment environment that makes it financially viable for private capital to fund new housing development.

None of these solutions are politically glamorous. They don't generate headlines about "cracking down on investors." They involve slow, unglamorous work on planning approvals, infrastructure charging, and workforce development. But they're the interventions that actually build homes.

Government Charges = Up to 1/3 of New Home Cost

One of the most underreported drivers of housing unaffordability is government-imposed charges on new developments. According to Property Council research cited in the HIA context, government charges — including infrastructure levies, development contributions, and taxes — can comprise up to one third of the cost of a new home.

This is a staggering figure. One in three dollars paid for a new home goes to government charges before a single brick is laid. And yet the policy debate focuses almost entirely on what investors can claim on tax — not on what governments charge to allow a home to be built.

If affordability is genuinely the goal, reducing the government charges on new housing construction would have a more direct and lasting impact than any CGT reform. It's worth asking why this conversation doesn't get the same airtime.

What Would Actually Help (Without Punishing Investors)

The policy toolkit for improving housing affordability without reducing supply includes:

1. Planning reform — Faster approvals, greater density allowances in established suburbs, reduced minimum lot sizes
2. Infrastructure charges reform — Reducing or deferring the government charges that comprise up to a third of new home costs
3. Build-to-rent incentives — Creating specific incentives for institutional investment in purpose-built rental housing (as distinct from taxing private investors more)
4. Workforce investment — The construction industry faces a severe skills shortage; training programs and immigration pathways for trade workers directly address building capacity
5. Social housing investment — Direct government investment in social and affordable housing stock, rather than using the tax system as a blunt instrument

None of these require reducing the tax incentives that underpin the private investment sector's willingness to fund rental housing. The HIA modelling is ultimately arguing for policy coherence: you cannot simultaneously claim to want more housing supply while removing the incentives that fund it.

Conclusion

The HIA's March 2026 modelling drops into a political debate that has been running in Australia for years — and it adds a weight of independent economic evidence that shouldn't be dismissed.

Australia has a genuine housing crisis. 1.3 million homes short since 2000 is not a rounding error. Rental vacancy rates at record lows, rents that have risen 30-40% in many markets since 2021, and a generation of Australians locked out of home ownership — these are real problems that demand real solutions.

The disagreement is about mechanism. The reform side argues that generous tax concessions for investors have inflated prices and locked out first-home buyers — and that the $247 billion in foregone CGT revenue could be better spent. The HIA and Property Council argue that reducing investment incentives will suppress new supply and push rents higher, ultimately harming the 30% of Australians who rent.

Both arguments have merit. Neither side has a monopoly on good faith. The honest answer is that Australia's housing crisis is structural and multi-causal — it will not be solved by any single policy change, whether that's taxing investors more or taxing them less.

What the HIA modelling makes clear is that any changes to CGT or negative gearing must be designed carefully, with eyes open to the supply consequences. A policy that improves the optics of housing affordability while reducing the stock of rental housing available is not a solution — it's a political manoeuvre.

For investors, the message is clear: stay informed, don't panic, and don't make major decisions based on proposals that haven't been legislated. The fundamentals of property investment in Australia — supply shortage, strong rental demand, population growth — remain intact. The tax environment may change. It hasn't yet. When it does, adjust. Until then, invest on fundamentals.