e61: 53% of Australian property investors would pay more under Labor reforms

Reserve Bank governor says budget reforms ‘very directly’ hit investor lending

Research from the e61 Institute found that 53% of Australian property investors would have paid more tax in total under reforms passed in Labor’s May budget, while 43% would have paid less. Co-author Dr Nick Garvin argued that public debate since the budget had overstated the reforms’ cost to landlords.

The institute’s analysis applied the new tax settings to historical data covering 2008 to 2025. It found that half of all landlords would have faced higher costs from the loss of negative gearing over that period if the new system had been in place — a finding the institute said suggested that the tax reforms alone cannot explain a slump in investment demand.

“The effect on investors is probably not nearly as bad as what’s being made out,” Garvin said. “If you’ve got 50-50 chance of being better off or worse off, it’s probably not going to affect your decision.”

The findings come against a sharp post-budget pullback in investor activity. New investor loan applications at the Commonwealth Bank fell 28% in two months after the budget’s release, and July data showed broader growth in investor credit had slowed. Reserve Bank Governor Michele Bullock said on Tuesday that the budget reforms had “very directly” impacted the market.

“[Applications] have really dropped a long way for investors,” Bullock said. “It has changed the dynamic for investors, whether it’s worth them investing in housing or not.”

The e61 research implied the reforms would only slightly add to investment costs, suggesting a much smaller impact on investment decisions than has occurred in reality. Rising interest rates have also added to investor costs this year, with another hike expected on Tuesday.

Garvin said some market commentary may have misjudged the impact of the reforms on investor activity because it overestimated investor profits on house sales. The median home in the paper’s sample earned an average annual capital gain of 3.3% after accounting for sales costs, and the sample included nearly 921,000 homes — a significant share of all investment properties bought and sold in the period.

Inflation averaged roughly 3% annually from 2008 to 2025, implying that a tenth of the median capital gain would be taxable under the new system. Half of the gain would have been taxed under the old system’s flat discount.

“It is possible that a rational investor would see the reforms as beneficial,” Garvin said.

The paper found that investors would likely pay more tax under the new system if they borrowed heavily to finance their purchase and invested in properties that rose rapidly in price or had little other income, such as retirees.

Treasurer Jim Chalmers declined to directly comment on the paper. A Treasury spokesperson linked the findings to conclusions in the May budget.

“The previous arrangements overcompensated some investors while undercompensating others and we are fixing that with a fairer and more neutral system,” the spokesperson said.

The Liberal shadow treasurer, Tim Wilson, said the budget’s “cruel twist” was that higher investor costs would be passed on as higher rents.

“Higher taxes will change investor behaviour leading to less housing available for rent and fewer homes being built,” Wilson said.

Garvin said investors could continue to buy and rent out homes if they prioritised long-term capital gains over short-term cashflow, which had been supported by negative gearing. About half of all investments are typically negatively geared — running at a rental loss that can be claimed on annual income tax — and most would have paid slightly more tax if the government’s reforms had been in place.

Negative gearing will now only be available for newly built homes, though owners of existing property can still carry forward and claim rental losses on their eventual capital gains tax bill when they sell.

Garvin said part of the post-budget drop reflected that some borrowers had needed negative gearing to afford an investment property. He said the strength of the reaction suggested investors may not have understood they can still claim losses, leading to what he called an “irrational” emphasis on the lost annual tax refund.

Dr Peter Tulip, chief economist at the Centre for Independent Studies, said investors would not be “naive or short-sighted” about negative gearing and would come to focus on capital gains. He said the e61 paper demonstrated that risk-averse investors would find property more attractive, as low gains would now be taxed less and high gains taxed more, making returns more predictable.

“Overall, housing is a safer investment than it used to be,” Tulip said.