Will negative gearing changes increase rents? Economists warn Perth, Brisbane and Sydney could be hit hardest

Investors won’t pay the highest price of the Australian government’s tax reforms – renters will. In stretched markets like Perth, Brisbane and even Sydney’s Blacktown, the consequences could be “disastrous” and fuel rent hikes within a year.

The warning comes from economists following the federal government’s sweeping overhaul of negative gearing and capital gains tax concessions in Tuesday’s budget, designed to reduce investor demand for established housing, slow house price growth and free up more homes for owner-occupiers.

But experts say this will tighten rental supply in markets where construction is already struggling to keep pace with demand, vacancy rates are critically low and rental yields have historically relied on negative gearing and long-term capital growth.

And if Melbourne’s recent investor tax experiment is anything to go by, they say renters will face far more than Treasury’s projected national increase of less than $2 a week and leave some tenants – already hanging on by a thread – scrambling to find somewhere to live.

Through its modelling, the government expects the reforms to push about 75,000 homes from investors to owner-occupiers over the next decade.

But with national rental vacancy rates already near record lows – plummeting to as low as 0.3 per cent in Perth – some warn that a drop of even 100 rentals could be catastrophic.

Ray White chief economist Nerida Conisbee expects rent rises to hit key areas within a year.

“The very basic mechanism of how property markets work is if you take away property investors it leads to fewer rental properties,” she says.

“Melbourne is a really good example of this. There, the government implemented a lot of taxes on investors during COVID, and what we saw there in just one year was a drop in 20,000 rentals. That data comes from the Victorian government.

“As a result, rent price growth moved at twice the rate of house price growth. So while, yes, this did moderate price growth, it shifted it onto rentals. And that was in a market where we’ve got a good supply.

“In cities like Perth, where supply is already so low, it will be an even bigger disaster.”

“In areas where there’s a sub-one per cent vacancy rate taking even 100 homes off the market will leave people scrambling to find places to live.”

Conisbee says the unintended consequences would even affect labour mobility, and while the government’s grandfathering provisions would prevent a mass exodus of existing investors, she expects the rental impact to be sharpest in established suburbs, family-home markets, and areas where yields are already notoriously low.

“The budget has tried to make things fairer but it’s shifting the problem from high price growth to high rental growth. It will be 12 months before it will bite, but it will,” she says.

Domain chief residential economist Dr Nicola Powell fears renters in traditional investor strongholds like Sydney will bear much of the pain, adding that for first-home buyers, much of the freed-up investor stock wouldn’t be suitable.

“There are pockets of our capitals that have a high concentration of rental demand, and there you have what we call ‘investment grade stock’.

“This means it isn’t typically built to owner-occupier quality or doesn’t have the layout that owner occupiers would want,” she says.

“Areas that have high levels of that are places like Melbourne’s Docklands and Sydney’s Olympic Park. And these are not top of the hit list for people who want to buy.”

She expects a new dynamic to play out among investors, which will “distort rental supply” and concentrate it in growth corridors on city fringes.

“Cities with a higher level of investment activity like Sydney will likely be impacted,” Powell says.

“Investors have traditionally gone there for the capital growth and now the changing of the capital gains tax discounts will impact that attractiveness. And yields are poor there.”

While she expects the reforms to reduce competition for first-home buyers, she says the broader impacts on rents would “very likely increase greater than $2 a week”.

“We have record low vacancy rates [across the country] and while of course we will see a change of home ownership rates and more buyers getting into the market, the government has made an assumption that the freed-up investor stock will go to first-home buyers.”

And then there’s the assumption that every Australian can and wants to buy a house, says Powell, which was a false ideal with potentially big consequences for low-income earners.

“These reforms are changing people’s lives,” she says.

“We have had favourable tax benefits for older generations, and now we are taking that benefit away from young people.

“And those that stay in the rental market and who are on lower incomes will ultimately pay more.”

AMP chief economist Dr Shane Oliver also expects the reforms to put upward pressure on rents, citing the Gold Coast as a particularly vulnerable city.

For current tenants, Oliver says little would likely change in the near future because existing investors have little incentive to sell.

But he warned the reforms could create a messier market over time, particularly in areas where investors had historically relied on negative gearing to justify low yields.

“I think the main issue will come from new buyers,” he says.

“If you’ve got less support from negative gearing, investors will be less forgiving of making a loss.

“This means a bias towards high interest gearing.”

Oliver says that while there was no certainty, massive rent rises were on the horizon, the reforms still did little to address the nation’s underlying housing shortage.

In Blacktown, where the average house rent yield sits at 3.04 per cent, and the median weekly rent price is $650, according to Domain’s latest Rent Report, Harcourts business development manager Christos Laliotitis expects future pain.

“Rental vacancy rates in the Blacktown area and in nearby Seven Hills are the lowest they’ve been in a very long time,” he says.

“Right now we have three homes on our rent roll.”

In a bid to battle low rental yields, he says investors had started adding granny flats to blocks to improve returns.

“The majority of our investors are a husband-and-wife team who have saved up to buy one investment property,” he says.

“For them, it was a way to secure themselves for the future.

“But the rental yield is really low here … I think due to this alone rents will increase but in terms of where it will go from there, I really don’t know.”

In Brisbane, where the current vacancy rate is 0.6 per cent, Place chief executive Damian Hackett says the city wouldn’t feel an immediate impact on rents, but over time, he expects the middle ring may be effected. 

“In reality the metrics haven’t changed,” he says.

“We’ll have the same number of rental properties on the market today and the same number of renters looking to rent.

“But areas where there’s more established homes could [eventually] be hit hard.”

Hackett adds that the changes to reforms and incentives would push investors into new stocks, which would likely just shift market pressure points.