The rental fallout from Negative Gearing and CGT Changes won't hit everywhere the same – And it won't hit all at once

Written by Anshu Vaidya, Founder – Premier Buyers | Licensed Buyer's Agent‍

In short: The 2026 Federal Budget restricted negative gearing to new builds and replaced the 50% CGT discount with indexation and a 30% minimum tax on capital gains – effective 1 July 2027. Existing investors are grandfathered. Treasury says rents may rise by $2 per week. But that's a national average – and nobody lives in a national average. The real impact will depend on where you are, how tight your local vacancy rate is, and how long you're willing to wait before it bites.

The budget ink is barely dry and the takes are already flying. "Rents will skyrocket." "It's only $2 a week." "The sky is falling." "Nothing will change."

Here's the uncomfortable truth nobody's saying clearly enough: they're all partially right – and all dangerously incomplete.

The real story isn't whether rents will rise. They will. The real story is where, when, and by how much – because the answer to each of those questions is completely different depending on which rental market you're standing in.

First, What Actually Changed

Let's cut through the noise.

On Budget night – 12 May 2026 at 7:30pm – two things happened.

Negative gearing was grandfathered.

If you already own an investment property, or had signed contracts before that moment, nothing changes for you. Your tax treatment stays exactly as it was. But from 1 July 2027, anyone buying an established residential property will no longer be able to offset rental losses against their salary or other personal income. Those losses get quarantined – they can only be used against other residential rental income or future capital gains from residential property.

New builds? Exempt. They keep full negative gearing and the 50% CGT discount. The government is betting this pushes investor money toward construction.

The CGT discount was replaced.

The flat 50% discount on capital gains for assets held over 12 months is gone for gains accruing from 1 July 2027. In its place: cost base indexation (adjusting your purchase price for inflation, similar to the pre-1999 system) and a minimum 30% tax rate on capital gains. For existing properties, gains up to 1 July 2027 can still partially access the old discount – gains after that date fall under the new regime.

SMSFs? No change. Superannuation funds keep the existing one-third CGT discount.

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The $2-per-week lie (sort of)

‍Treasury's headline estimate – that rents could increase by around $2 per week for a household paying the median rent – has been parroted by just about everyone since Budget night. CBA's post-budget analysis called it "broadly in line" with their own modelling.

But here's the problem with national averages: nobody lives in a national average.

Australia's rental market isn't one market. It's dozens of wildly different markets stapled together by geography. Perth's vacancy rate in March 2026 sat at 0.5%. Hobart was at 0.4%. Darwin, 0.4%. Brisbane, 0.8%. Meanwhile, Melbourne was at 1.4% and Sydney at 1.1%.

A $2 average means some markets will see almost nothing. Others will see significantly more. And the timing won't be uniform either.

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Why rents won't spike on Day One

‍This is the part most breathless headlines get wrong.

The negative gearing changes are grandfathered. Every single property currently held by an investor retains the existing tax treatment. There's no forced selling. No overnight supply shock. No mass exodus of landlords from the market.

In fact, the opposite happens. CBA's analysis identifies what they call a "lock-in effect" – existing investors now have a stronger incentive to hold, because selling means giving up grandfathered tax benefits they can never get back. The CGT changes reinforce this: with a 30% minimum tax on gains accruing from 1 July 2027, there's less incentive to crystallise gains by selling. Holding becomes the default.

So the rental supply doesn't drop off a cliff on 1 July 2027. What happens instead is a slow bleed. Each year, some investors sell – because of retirement, debt reduction, divorce, life changes, portfolio restructuring. Each property that sells to an owner-occupier is one less rental. And each new investor who would have bought an established rental property but now doesn't, because the tax numbers no longer stack up, is one less landlord entering the market.

The rental pool shrinks gradually. Not overnight. Not uniformly.

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Where it hits hardest: Follow the Vacancy Rate

Here's where it gets interesting – and where the "it's only $2" crowd need to pay closer attention.

The rental markets most exposed to upward pressure are the ones already running at crisis-level vacancy. And Australia has plenty of those.

The tight markets – Perth, Brisbane, Adelaide, Hobart, Darwin and sub-markets within each city:

These cities are already running vacancy rates between 0.4% and 1.1%. A balanced rental market is generally considered to be 2.5% to 3%. We're not even in the same postcode as balanced.

When vacancy is this low, every single property that leaves the rental pool has an outsized effect. There's no buffer. No slack. The system is already stretched so tight that marginal changes in supply translate almost immediately into rent increases.

SQM Research's April 2026 data shows national rents running at 6.6% year-on-year growth – nearly double the pace of wage growth (approximately 3.4% according to the ABS Wage Price Index). In Perth and Darwin, rent growth is running even faster.

Now layer the negative gearing changes on top: fewer new investors entering the established rental market, some existing investors gradually selling, and demand from tenants still rising. In these markets, the $2 per week figure is a joke. Rent growth will compound. Year two will be worse than year one. Year three worse again – until either supply catches up or tenants simply can't pay any more.

Domain's March 2026 Rent Report describes an "affordability ceiling" in several markets, where households simply can't stretch further regardless of how many people show up at the inspection. But ceilings have a habit of moving when there's nowhere else to go.

The softer markets – Melbourne, parts of Sydney, Canberra:

Melbourne, sitting at around 1.4% to 1.8% vacancy depending on whose data you follow, has a little more room. It's tight by historical standards (the pre-COVID decade average nationally was 2.5% to 3.3%), but it's the loosest of the capitals.

These markets will feel the changes more slowly. Existing investors see no change. New investor activity was already softer in these cities. And there's more rental stock to absorb any gradual reduction in supply before rents start climbing noticeably.

That said – don't confuse "slower" with "immune." Even Melbourne is well below a balanced vacancy rate. The cushion is thin, not absent.

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The Yield Problem: Why low-yield areas get punished most

Here's a dynamic almost no one is talking about.

Negative gearing, by definition, matters most when a property is running at a loss. And properties are most likely to run at a loss when rental yields are low – meaning the rent is small relative to the property's value.

Think premium suburbs in Sydney. Inner-city Melbourne. High-value, low-yield areas where the entire investment thesis was: take the tax loss now, ride the capital growth, sell later and pocket a discounted gain.

Under the new rules, that playbook is dead for established properties. The loss can't be offset against your salary. The capital gain no longer gets a flat 50% discount. The whole equation shifts.

So what happens?

New investors avoid these markets. Some existing investors accelerate their exit (especially those already heading into a debt-reduction or consolidation phase). Capital migrates toward higher-yielding assets – regional properties, new builds, commercial property, or out of property entirely.

Meanwhile, in higher-yield markets – think regional centres, some outer suburban pockets, parts of Queensland and South Australia – the numbers may still work even without full negative gearing. These areas attract relatively more investor interest. Vacancy was already tight. Rent growth accelerates.

The irony? The markets that were already most expensive for tenants (high-yield, tight-vacancy areas) get squeezed further. The markets where landlords were already doing fine don't change much. Not exactly a progressive outcome.

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What New Zealand taught us (And what we ignored)

In March 2021, New Zealand's Labour government removed the ability for residential property investors to deduct mortgage interest from rental income. New builds were exempt. Sound familiar?

The results weren't pretty. Rents hit record levels nationally. NZ's Inland Revenue had actually warned the government before the policy was introduced that it was unlikely to improve housing affordability and would instead push rents higher and reduce long-term rental supply. They were right.

To make matters worse, interest rates surged from around 2% to over 6% in the years that followed. Investors found themselves paying tax on fictional profits because their largest real cost – mortgage interest – was no longer recognised. Negative gearing was reinstated in 2024 after a change of government.

Now – context matters. NZ didn't grandfathering existing holdings the same way Australia is. NZ's market is smaller and less diverse. And the interest rate shock was a separate compounding factor. But the directional lesson is clear: when you make it harder for private investors to hold rental property, rental supply tightens and rents go up. The mechanism isn't complicated.

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The 1985 Experiment: What actually happened

Australia has been here before. The Hawke government quarantined negative gearing between 1985 and 1987 – identical in structure to what's being introduced now.

The industry loves to cite this period as proof that rents exploded. The ABS data tells a more nuanced story:

→ Rents rose sharply in Sydney and Perth – both of which had tight vacancy rates at the time

→ Rents were flat or actually fell in Melbourne, Adelaide, and Brisbane

→ Nationally, rent growth during 1985-87 wasn't even the highest period of the decade – it was higher both before and after

The Grattan Institute and others have argued that what drove rents in Sydney and Perth wasn't the tax change itself, but population growth and insufficient construction in those cities at the time.

This is exactly the point. The impact wasn't uniform. It followed vacancy. Cities where the market was already tight got hit. Cities with more supply headroom barely noticed.

The 2026 changes will play out the same way.

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The Migration Wildcard

This is where the government's own numbers make their $2-per-week estimate look optimistic.

Net overseas migration has pulled back from its pandemic-era peak of 538,000 in 2022-23 to 306,000 in 2024-25. The 2025 Population Statement projects a further decline to 260,000 in calendar year 2026.

But even at 260,000, that's roughly 2.7 times Australia's historical long-term average of 90,000 per annum (the average between 1945 and 2007). The budget papers project total NOM of 1.22 million between 2025-26 and 2029-30.

Every new arrival needs a roof. Most start as renters. And Australia is building roughly 170,000 dwellings per year against an estimated requirement of 240,000.

So the demand side isn't easing. The supply side is now being structurally disincentivised from growing (at least in the established rental market). And the markets where migrants overwhelmingly land – Sydney, Melbourne, Brisbane – are already operating at well below balanced vacancy.

Layer the negative gearing changes on top of migration that's still running hot by historical standards, and you've got a recipe for compounding rental pressure – especially in the tight-vacancy, high-migration corridors.

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What this actually means – A practical view

Here's how we see this playing out:

Year 1 (July 2027 – June 2028):

Minimal immediate impact on rents. Grandfathering protects existing supply. Investor sentiment cools but supply doesn't drop materially. Some markets might not notice any change at all. The Treasury's $2 per week might hold as a broad average – though that average hides enormous variation.

Year 2 onwards:

The slow bleed begins. Investors who were going to sell anyway start selling. New investor entry slows, particularly in low-yield established markets. The rental pool contracts at the margins. In tight-vacancy markets – Perth, Brisbane, Adelaide, Hobart – rents start climbing faster. In softer markets – Melbourne, parts of regional NSW – the effect is muted but present.

Year 3-5:

This is where compounding kicks in. Each year, fewer new established rentals enter the market. Each year, some existing rentals leave it. Migration, even at moderating levels, keeps adding tenants. Construction, incentivised toward new builds but constrained by costs and labour, can't fill the gap quickly enough.

‍ The $2 per week isn't a number that stays at $2. It grows. Unevenly. Unpredictably. But it grows.

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The Bottom Line

The government has made a political calculation: that grandfathering existing investors and redirecting capital toward new builds will be enough to prevent a rental crisis while improving housing affordability for buyers.

Maybe. Over the long term. If construction scales. If migration moderates. If enough new supply comes online to replace the established rental stock that gradually leaves the market.

But in the short-to-medium term – particularly in markets where vacancy rates are already at crisis levels – renters are the ones who pay the adjustment cost. And that cost won't arrive neatly, predictably, or equally.

It will arrive slowly, then all at once. And it will arrive hardest in the places that can least afford it.

This article is general information only and does not constitute financial, tax, or legal advice. Investors should seek independent professional advice tailored to their individual circumstances before making any property or financial decisions.

Premier Buyers Pty Ltd is a licensed buyer's agency operating across Australia (except NT).

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