What negative gearing and capital gains tax do – here’s the data; here’s the evidence

It is evident that the federal government is concerned about the substantial and increasing inequity in the housing market and appears to be contemplating changes to the extremely generous tax benefits that accrue to investors in residential property.

Clearly, something needs to be done.

The phenomenal scale of the present tax incentives around property is indicated by the revenue forgone. In 2024-2025, the estimated revenue forgone by the federal government due to negative gearing was $6.5 billion, and $5.490 billion was lost to the capital gains tax discount, $11.990 billion in total.

In the decade 2025-2026 to 2035-2036, the Parliamentary Budget Office has estimated that a staggering $193.89 billion of revenue will be forgone if the present tax regime is maintained. 

The contested impacts of the present tax system are whether it contributes to higher house prices due to investors being prepared to pay more, and, related to this, whether first home buyers are being thwarted by being constantly outbid by investors.

Research does suggest that the tax system encourages higher house prices by encouraging speculation, and that investors make it more difficult for first home buyers to enter the market. There are also constant anecdotal reports of potential first time home buyers being outbid by investors.

Besides the revenue forgone, what is incontestable is the enormous extent of investor activity in the housing market. The table below shows the loan commitments for housing finance by quarter in 2025 and the totals for the year.

The number of loans for residential dwellings to investors was almost double the number of loans to first home buyers.

In 2025, there were 548,006 new loan commitments for residential dwellings: investors accounted for a staggering 214,352 (39 per cent) of new loan commitments, first home buyers accounted for 118,664 (21.6 per cent) and non-first homeowners for 215,606 (39.3 per cent). 

	March quarter		June quarter		Sept. quarter		Dec. quarter		2025 total
	Number	%	Number	%	Number	%	Number	%	Number	%
First home buyers	28,383	22	28,861	22	29,637	21	31,783	21	118,664	22
Non first home buyers	50,822	40	52,331	40	55,171	39	57,282	38	215,606	39
Investors	47,218	37	49,065	38	57,624	41	60,445	40	214,352	39
Total loan commitments	127,108	100	129,994	100	141,470	100	149,434	100	548,006	100

Noteworthy, is that during 2025, the number of loans to investors increased substantially, from 47,218 in the March quarter to 60,445 in the December quarter, an increase of 13,227 (28 per cent).

In contrast, the increase in the number of first home buyers was minimal – from 28,383 in the March quarter to 31,783 in the December quarter, an increase of 3400 (12 per cent).  The data suggest that many first-time home buyers are being shut out of accessing home ownership by investors. 

The most probable changes to the tax system being discussed – lowering the capital gains tax discount from 50 per cent to 33 per cent and restricting negative gearing to two properties – would be a start, but probably not enough to have an impact on house prices or on whether individuals decide to purchase an investment property. The changes are also unlikely to dissipate the difficulties potential first home buyers have entering the market.

We need an ambitious shift – one that deters investors

What is required is a far more ambitious modification of the tax regime – a shift that will deter potential investors.

There is a precedent; between mid-2017 and mid-2019, when it was clear that federal Labor was going to reform negative gearing and the capital gains tax discount if it won government, the value of investor lending in Victoria and NSW fell by close to 50 per cent and house prices in the eight capital cities declined by 11.5 per cent.

The drop in house prices in this period indicates that a substantial drop in the number of people purchasing an investment property is likely to stabilise house prices and allow more potential first home buyers to actually purchase.

Let us speculate for a moment. If a tax regime were in place in 2025 that made investing in residential property a far less attractive option, and half of the 214,352 individuals who bought an investment property had decided not to, that would have released an additional 107,176 residential properties onto the market.  

We can conclude that a sizeable proportion of these properties would have been bought by first time home buyers.

The drop in house prices in this period indicates that a substantial drop in the number of people purchasing an investment property is likely to stabilise house prices and allow more potential first home buyers to actually purchase.

In sum, a change in the tax regime that makes investing in residential property far less attractive could be game changer and dramatically improve the quality of life of tens of thousands of Australian households who would be able to purchase a home, have a lifelong asset and be no longer reliant on the deeply insecure private rental sector.

In addition, if half of the revenue that would have been forgone over the next decade is recouped (equivalent to $97 billion) by the federal government and is used for housing, an additional 97,000 social and affordable homes could be built, assuming each property costs a million dollars. Australia has a housing crisis that has a range of serious consequences – the government needs to be bold.

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