What the? Weak housing arguments frame the 2026 Federal Budget
I was fascinated by this ABC article, which welcomed the federal Labor Government’s expected changes to negative gearing and capital gains tax in the 2026 Budget. While the article focuses heavily on tax policy as the lever for change, it largely omits the supply-side pressures of record migration and high construction costs. It also ignores the massive burden Labor’s massive and unbridled spending has on the budget, ensuring the young are locked in to paying off the debt for decades to come. Finally, it ignores the fact that when the older generation have taken out a mortgage to fund a rental property investment, they are reducing their burden on social welfare, specifically the government funded pension.
The ABC article asserts that Australian real estate has shifted from a means of providing shelter to a “casino” where wealth is determined by inheritance rather than hard work, creating a class of “landed gentry.” By citing Parliamentary Budget Office data, the article claims current tax settings disproportionately benefit the top 10 per cent of earners and have fueled a 25-year price surge, specifically pointing to the 1999 CGT changes as a primary catalyst.
Meanwhile, the ABC disputes the argument that tax incentives drive housing supply, noting that 77 per cent of negatively geared investors buy established dwellings, and are therefore simply “swapping flats”, outbidding first-home buyers for entry-level stock and doing nothing to increase supply.
Of course, if migration were considered in the article, one might realise the supply issue is the result of a demand issue. Too much migration.
Ultimately, the article suggests the 2026 budget changes are a moral imperative to ensure that future generations are not permanently locked out of home ownership. I can assure you these changes will do nothing to improve supply for the young or increase affordability for those who cannot already afford a property. What they will do is distract voters from Labor’s mismanagement of its finances, distract from the massive impost rising energy prices (the result of Labor’s Net Zero policy) is having on the young, and distract from the fact an increasing number of people will be dependent on the government pension for their retirement incomes.
The article makes several startling claims that require careful consideration.
Ignoring migration
The article attributes the “soaring” value of real estate almost exclusively to tax arrangements. However, it ignores the fundamental law of supply and demand. In 2023-2024, Australia saw record-breaking Net Overseas Migration (NOM), with over 500,000 people arriving in a single year.
Tax policy doesn’t create the physical need for a roof; population growth does. When population growth outstrips housing completions (which have stagnated due to planning bottlenecks), prices rise regardless of tax incentives. By ignoring migration, the article mislabels a demand-driven “supply shortage” as a “tax-driven” bubble.
The landed gentry
The ABC further contends negative gearing and Capital Gains Tax (CGT) are “Handouts” for the “Landed Gentry”, and that these tax settings are unfair advantages for the wealthy, creating a “class-ridden society.”
According to Australian Taxation Office (ATO) data, the vast majority of “investors” are not “landed gentry.” Approximately 71 per cent of property investors own only one investment property.
The largest cohorts of property investors are middle-income earners, including nurses, teachers, and police officers, who use property as a long-term retirement vehicle because Australia’s pension system is insufficient.
Negative gearing is not a “handout” but a standard tax principle: the ability to deduct the costs of earning income against that income. Removing it specifically for property would be a “carve-out” that treats property differently from other forms of investment (such as shares or business expenses).
Negative gearing and supply
Comfortably retired economist Saul Eslake is quoted as saying landlords mostly buy established properties, “swapping flats” and doing nothing for supply. But this view ignores the secondary market’s role in the construction ecosystem.
You see, developers rely on “off-the-plan” sales to secure financing for new high-density projects and investors are the primary buyers of these units. If you remove the incentive to hold property (CGT discount/Negative Gearing), the pool of investors shrinks, making new projects unviable. Less supply.
Furthermore, when an investor buys an established home and renovates it, or replaces a single dwelling with townhouses, they increase the density and quality of the stock. Removing tax incentives reduces the capital available for these essential property improvements.
1999 Capital Gains Tax Change
The article cynically draws a causal relationship between Peter Costello’s 1999 CGT changes and strongly rising house prices since then.
This is a ‘correlation vs. causation’ fallacy. Several other massive economic shifts occurred simultaneously. The first was global interest rates began a 30-year structural decline in the late 90s, dramatically increasing borrowing capacity. Second, as more women entered the workforce and stayed in full-time roles, the “purchasing power” of a standard household doubled, allowing couples to bid higher for the same homes.
And finally, banks became more aggressive in lending, moving from “3x salary” rules to more complex serviceability models. To blame a 50 per cent CGT discount – which replaced a complex “inflation indexing” system – for a 25-year price trend is economically reductive, but perhaps convenient!
The Covid rental experiment
The article claims that when investors “fled” during COVID, renters became owners, proving that the ownership mix can change without destroying the market.
This “experiment” actually proved the opposite: a rental crisis. While some renters became owners, the total number of people needing homes stayed the same, but the average household size decreased (people wanted more space/home offices).
The exit of investors contributed to the record low vacancy rates seen in 2023-2024 (below 1 per cent in many cities). When investors sell, the property often moves from a high-density rental (e.g., four students in a house) to a low-density owner-occupier home (e.g., a couple). This reduces the total number of people housed in the existing stock, worsening the shortage for those who can’t afford to buy.
The “Insidious” bank of mum and dad
Finally, the article frames this intergenerational help as a symptom of a broken, class-based system while ignoring that intergenerational transfers are a natural response to government-imposed costs.
Up to 40 per cent of the cost of a new home in Australia consists of government taxes, fees, and charges (Stamp duty, GST, infrastructure levies, and developer contributions). If the government truly wanted to help young people buy homes, it would focus on reducing these transaction costs rather than attacking families who are trying to help their children overcome the very hurdles the state has created.
The bottom line is the “Bank of Mum and Dad” is a symptom of regulatory failure (zoning laws that prevent high-density building) rather than tax policy failure.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
