By Blake Lieschke – Director – Validated Group

Our friends in Canberra are once again putting property at the centre of national tax reform debate, with proposed changes to Capital Gains Tax (CGT) concessions and negative gearing likely to feature prominently in the Federal Government’s 2026 budget agenda. While no legislation has yet been passed, the policy discussion has intensified significantly. Their end goal – improving housing affordability and tackle intergenerational equity?

From the perspective of a seasoned (read sceptical) property valuation professional, these proposed reforms are not simply a taxation issue — they have the potential to materially alter investor behaviour, transaction levels, market liquidity and ultimately property values across both residential and commercial sectors.

WHAT CHANGES ARE BEING PROPOSED?

At present, Australian investors who hold an asset for more than 12 months are generally entitled to a 50% CGT discount. This means only half of the capital gain is added to taxable income upon sale.

The reforms currently being debated include:

• Reducing the CGT discount from 50% to somewhere between 25% and 33%
• Restricting or capping negative gearing deductions
• Limiting tax concessions to newly constructed dwellings
• Introducing grandfathering provisions to protect existing investments
• Potentially reverting to the pre-1999 inflation indexation method for capital gains calculations.

The stated objective of the reforms is to improve housing affordability and reduce speculative investment demand, particularly within the residential market. However, the broader implications extend well beyond housing policy.

RESIDENTIAL PROPERTY MARKET IMPACTS

The critical thing to remember here is – Australia needs property investors (mums and dads) to maintain adequate supply of rental stock. Especially in the middle of a housing crisis. In the context of Perth as at May 2026, we are still in the ‘cant rent a house, can’t buy a house’ phase.

Reduced Investor Demand

The residential investment market has historically been underpinned by two major incentives:

• Negative gearing during ownership.
• Concessional CGT treatment upon disposal.

Reducing the CGT discount materially changes the after-tax return profile for investors, particularly those relying on long-term capital growth strategies.

For many investors, especially in metropolitan markets where rental yields remain compressed, the investment equation becomes less attractive if future capital gains are taxed more heavily. Particularly when met with a rising interest rate environment we are currently bracing for.

As valuers, we understand that market value is fundamentally linked to participant (buyer & seller) behaviour. If investor appetite softens, particularly in investor-heavy markets such as inner-city apartments or developing  residential areas, this may be all that’s needed to tip the balance scale from a selling market, to a buyers market.

The likely outcome is unlikely to be a market correction or ‘crash’ as some may be hoping for, but rather a moderation in price growth.

BUT, this effect may be temporary, since construction cost remain high, the introduction of new house stock is limited. If investment demand reduces and future investment supply falls, rent will rise and the accompanying rising rental yields will re-attract investors.

Increased Importance of Yield Fundamentals

Up until recent years, Australian residential investors have traditionally prioritised capital growth over income return and/or yield.

A reduced CGT discount is likely to shift investor focus toward:

• stronger pursuit of rental yields.
• lower holding costs.
• development or value-add opportunities.

When investors chase yield over capital growth in residential assets, they typically pursue lower quality, secondary investment stock in regional and affordable housing markets. We may also see a significant rise in build-to-rent projects and a increased participation from corporates, institutions and superannuation funds as they fill the void in departing mum and dad investors.

Short-Term Market Distortion and Transaction Timing

We are already seeing the short-term impacts following the proposed announcements with a surge in transactional activity (accelerated acquisitions and pre-rollout disposals) prior to a proposed implementation date.

The proposed changes will no doubt dampen ‘hit and run’ speculators and property flippers looking to get in and out of the market and secure short term capital gains.

If grandfathering provisions are introduced — which appears politically likely — existing assets purchased before a nominated date may attract a premium due to retained concessional tax treatment. Potentially locking up some future supply of existing housing stock as newly acquired dwellings are subject to less favourable tax position.

Rental Market Pressures

Any reduction in investment demand will constrain rental supply in the short to medium term and place upward pressure on rents. Perth is already battling record low vacancy rates, while this appears to be easing slightly, reducing investment demand could potentially be a disaster for rents and create a world of pain for years to come.

COMMERCIAL PROPERTY MARKET IMPACTS

While the focus and political drivers behind proposed tax reforms has largely been around residential housing, the commercial property market will be impacted, in particular some specific commercial asset classes.

Capital Reallocation into Commercial Assets

If residential property becomes less tax-efficient, some investors, in particular high-net-worth and those with access to significant equity may redirect capital toward commercial property assets as they pursue stronger returns/yields, diversification and alternative tax structuring opportunities.

The commercial asset classes likely to benefit the most include:

• Industrial
• Retail (small format & neighbourhood)
• Medical
• Build-to-rent development

Commercial assets with strong leases, secure income streams and value add potential would likely be the first to benefit from increased demand from investors seeking yield stability in lieu than speculative capital growth.

Increased Institutional Build-to-Rent Activity

If negative gearing concessions become limited to newly constructed dwellings, the changes may inadvertently accelerate institutional investment into build-to-rent housing. This would represent a structural shift in Australia’s traditionally fragmented residential investment market toward larger professionally managed residential portfolios and institutional ownership models

Reduced Transaction Volumes

One of the most underappreciated consequences of CGT reform is its effect on market liquidity.

Higher CGT liabilities generally encourage investors to hold assets longer to defer tax obligations. This can reduce transactional turnover, available market supply & value transparency. This issue may become particularly pronounced in secondary commercial markets and specialised asset classes where these assets are already thinly traded

THE VALUATION PROFESSION’S PERSPECTIVE

From a professional valuation standpoint, tax policy changes do not directly determine value — but they strongly influence market behaviour, and market behaviour ultimately drives value.

The proposed CGT reforms are likely to reshape:

• investor motivation;
• holding strategies;
• market liquidity;
• risk appetite; and
• asset allocation decisions.

Importantly, the impact will not be uniform across all property sectors or geographic locations.

Markets heavily reliant on investor participation may experience softer demand conditions, while income-focused sectors with strong fundamentals could become increasingly attractive.

As valuers, this environment reinforces the importance of:

• rigorous market evidence analysis;
• understanding purchaser motivations;
• interpreting behavioural economics; and
• distinguishing short-term policy reactions from long-term market fundamentals.

Final Thoughts

While the proposed changes seek to achieve noble goals, improving housing affordability and generational equity is certainly a nice wish list, it like no doubt create some chaos in the initial shock phase. On the residential front, things will likely get worse before they get better and on the commercial side, will likely see investors who still want property to form a part of their overall investment strategy, become the next likely acquisition target.

Australia’s property market has always evolved alongside taxation policy, interest rate cycles and demographic change. While the proposed CGT reforms may alter investment behaviour and market dynamics, they are unlikely to fundamentally undermine the long-term role of property as a core asset class and investment vehicle.

The reforms would mark a significant transition away from speculative growth-driven investing toward a more income-focused, long term strategy and professionally institutionalised market environment.