Labor’s tax crackdown backfiring on first-home buyers
Treasurer Jim Chalmers stepped up to the dispatch box in May 2026 to announce a sweeping overhaul of negative gearing and capital gains tax (CGT).
By stripping negative gearing from established properties purchased after May 12 and swapping the 50 per cent CGT discount for an inflation-indexed method and a 30 per cent minimum tax floor from July 2027, the Albanese Labor Government claimed to be setting out to achieve a progressive holy grail. Putting aside that this was nothing more than another tax grab to plug a budget hole born of profligate spending, fiscal waste and mismanagement, they claimed to be tilting the playing field away from wealthy property hoarders and toward aspiring young first-home buyers.
Two months later, the early data is in. And while the reforms have successfully detonated a bomb under housing market activity, the fallout has been completely twisted. Instead of ushering young Australians into their dream homes, Labor’s housing policy has locked them out faster than ever.
The policy is hurting the exact people it was meant to help.
Lending demand has evaporated
According to global credit reporting agency Equifax, the Australian mortgage market is experiencing an accelerating downturn. Overall home loan demand plunged 14 per cent year-on-year (YoY) in June, an acceleration from the 10.9 per cent drop recorded in May.
But the critical statistic lies in the breakdown of who is walking away. The tax reforms were intended to deter investors, and they have: investor mortgage demand fell by 9.8 per cent in May and deteriorated further to a 12.7 per cent drop in June.
However, first-home buyer demand fell by even more – 17 per cent in June, coming off a 13 per cent drop in May. This is the sharpest monthly decline in first-home buyer lending in nearly four years.
Young buyers are abandoning the market at a significantly faster rate than the investors they were supposed to replace.
Auction clearance rates
Nowhere is the sudden shift in developer and buyer psychology clearer than at auctions around the country. Cotality data for the week ending June 28, 2026, reveals a national weighted clearance rate that has collapsed to 45 per cent – the fifth consecutive week below 50 per cent, mean more properties are passing in than are being sold.
In Brisbane, clearance rates are at just 36.8 per cent, Canberra: 41.3 per cent, Sydney: 43.1 per cent, Melbourne: 46.6 per cent, and Adelaide: 53.4 per cent. The national average is now just 45.0 per cent. So dire is the auction picture that vendors are fleeing the format almost entirely. The share of properties listed via auction peaked at 45 per cent back in November but has now retreated to just over 30 per cent in June 2026. Meanwhile, median days on market has ballooned out to 32 days nationally.
Why the policy is failing young people
The data proves the market is weakening, but it simultaneously proves both Labor’s engineering and intentions are failing.
Why are first-home buyers collapsing faster than investors?
First, the policy mismatch. By grandfathering all existing properties purchased before the budget night, Labor created a powerful ‘lock-in’. Existing investors have no incentive to sell their properties, because doing so means giving up their permanently protected negative gearing benefits.
Second, Labor’s changes came after APRA implemented their stricter loan-to-income caps for bank lending. While a 3.2 per cent drop in Sydney house prices sounds like a win for a 25-year-old, their actual borrowing capacity has been eroded by more.
Third, investors are pivoting, not quitting. Labor’s budget specifically left negative gearing and the 50 per cent CGT discount intact for new builds to protect supply. So, while yes, there are fewer investors around, those that remain are shifting their focus away from established homes and into new developments, subdivisions, and houses.
As a result, first-home buyers find themselves in the worst of all worlds: borrowing capacity is severely restricted, the supply of established entry-level homes is choked off by grandfathered investments, and they’re left to compete with investors for the relatively thin supply of new builds.
On top of all that, consumer confidence has tanked so significantly that the ‘wealth effect’ from falling home values is threatening broader retail spending and economic growth, making job security another problem for young potential first home buyers to worry about.
The counter-argument: Is this just a transition?
Defenders of the Labor government’s policy will argue that judging a multi-decade structural tax change based on eight weeks of winter data is premature. They’ll invariably make two arguments:
The first will be, the market is just experiencing a temporary period of readjustment. This is the view shared by corporate analysts like David Bailey, CEO of the Australian Finance Group (AFG), who argues the current drop-off is transitional rather than a structural shift in underlying demand. His theory is that once buyers absorb the new tax rules and the Reserve Bank of Australia (RBA) eventually begins to cut rates, first-home buyers will step into a permanently cooled, less speculative market.
The second is that falling house prices are exactly what affordability looks like. You cannot make housing affordable without property prices falling. The 3.2 per cent drop in Sydney is a feature, not a bug, of the policy.
While these points seem eminently sensible, they ignore the reality of the banking ecosystem. Moody’s recently issued a stark warning that these tax reforms will directly “pressure earnings of Australian banks” and compress net interest margins as high-margin investor lending dries up. The problem is that when bank earnings compress, and bad debts rise, banks don’t become more lenient; they tighten their lending criteria.
A first-home buyer doesn’t benefit from a $30,000 drop in a median house price if the bank now requires a higher credit score, stricter income verification, and a larger risk premium or serviceability buffer.
The bottom line
The Albanese Government set out to dismantle a tax system they claimed favoured wealth over work. But by implementing a sudden tax squeeze, and right in the middle of a higher-interest-rate environment, they have caused a crisis of confidence.
Instead of opening the door for young Australians, two months of data reveal a frozen property market where investors are holding tightly onto their grandfathered tax havens, banks are tightening their belts, and first-home buyers are sitting on their hands or competing with investors for new builds. Ultimately, they’re locked out by the very policy claimed to liberate them. Labor’s intentions might be noble, but like many of the things they try and centrally control, the data tells us another system has been broken, and the young are still paying the price.
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.
