Weeks on from the Budget and we’ve seen some dramatic shifts across the property market. Investors are pulling back, with a flow-on effect on auction clearance rates, loan enquiries and, for some, borrowing capacity.

The revamped capital gains tax (CGT) and property gearing changes in Australia are reducing investor tax breaks and therefore the net equity (the after-tax profit) of your investments. That may mean an end to the traditional property investment playbook.

Change is part of the financial landscape, and just as we look for opportunity during market volatility, understanding the changes and alternative investment strategies will help you stay on track to meet long-term financial goals.

An overview of CGT and property gearing changes in Australia 

As we recently reported, the May Budget introduced key changes to property gearing and CGT.

Negative gearing, as it’s more often called, has traditionally allowed investors to offset losses from investment properties with other assets to reduce taxable income. The changes mean that the gearing will now only apply to new builds, an incentive to encourage investment in new homes to help ease the housing shortage. The scheme will be grandfathered, however, meaning existing properties are exempt from the changes.

Introduced in 1985, the CGT is a tax that applies when assets such as shares or investment properties that have been held for at least 12 months are sold. The tax is applied to the amount that the asset has increased in value (the capital gain). Under the initial scheme, the tax was tied to inflation, before it shifted to a flat 50% tax in 1999. With the CGT now to revert to its original design, the huge benefits that investors have reaped with the current model are set to slow.

So, what does that mean exactly? As an example, if you currently sell an asset with a $1 million profit, you are taxed on 50% of the capital gain, or $500,000. From 1 July 2027, the tax will be calculated on factors including inflation adjustments (the original cost of your investment adjusted to inflation) and your marginal tax rate. While you only pay tax on the capital gain, there is the chance that asset gains will push you into a higher marginal tax bracket, meaning higher-growth investments may mean higher taxes.

The revamped CGT will not apply to your primary home, superannuation or new-build properties. There will be a minimum 30% tax rate on realised capital gains accruing from 1 July 2027, and a minimum 30% tax on discretionary trusts from 1 July 2028.

Calculating tax with the negative gearing and CGT changes will be more complex, which is why it will be important to seek tailored advice before making any financial decisions.

What we’re seeing in the data

While it’s been less than two months since the Budget, the shifts in some segments have been startling. Sydney mortgage broker Michael Coombs reports that among his clients, investment loan enquiries are down more than 50%. He has also seen clients’ borrowing capacity reduced by between 5% and 20%, with banks now excluding projected tax benefits when calculating borrowing capacity.

The Domain Forecast Report 2027 suggests that the combination of cyclical and structural shifts (RBA rate increases and the tax changes) is resulting in a fractured national market, with cities with different affordability profiles, investor exposures and supply dynamics performing at different levels.

According to data from Cotality, Adelaide is one of the few Australian cities to see auction volumes increase, with a clearance rate of 68.7% for the 20–21 June weekend. That same weekend, Sydney’s auction clearance rate was at its lowest since April 2020. In Melbourne, rates fell to 2021 levels (during Covid-19 lockdowns). Nationally, the preliminary clearance rate stood at 49.2%, based on a lower-than-average 1,771 homes at auction.

While data like this may be disquieting for some investors, there are ways to stay on track during economic uncertainty. We also suggest looking at alternative investment strategies – and one of these is the equity-to-market approach.

The old playbook vs. the equity-to-market opportunity

Historically, there’s been a tried-and-true playbook for property investors – using equity from one property to buy another. That is looking harder with the CGT and negative gearing changes, but there are alternatives.

Most people are aware that once you have a home, you can leverage your equity to invest in the property market. What you may not realise is that property isn’t your only investment option.

Equity, for instance, can be used to move into the share market and invest in stock, managed funds or exchange-traded funds (EFTs). Unlocking the equity investment strategy may help you diversify your portfolio, but like any investment, it does carry risk. You are leveraging what may be your primary property, so you need to be sure that it fits your circumstances.

Unlocking the equity investment strategy

The tax changes will affect many investors, which is why we’re making it the focus of our next webinar.

On 4 August, Newealth Director Dejan Pekic will be joined by Mortgage Broker Michael Brown. With decades of combined experience, they’ll be chatting about investing with equity and what you need to consider.

If you’re keen to hear more, why not join us?

Register for the 4 August webinar here.

Or book a call for a confidential discussion.

General Advice Warning:

The information in this blog is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate for you and seek professional advice before making any financial decisions.
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