Extract from Eureka Street
- Home
- Vol 36 No 9
- Chalmers challenges the politics of negative gearing
- David James
- 14 May 2026
It had to happen eventually. The federal government’s decision to abolish negative gearing on property investment, with the exception of newly built homes, has gone a long way towards correcting the biggest distortion in Australian society: the tripling of property prices this century, which has made it impossible for most younger people to own their own home. Among other things, it has been a factor preventing many people from starting their own families.
The government will, in parallel, abolish the 50 per cent capital gains tax discount on properties held for more than a year, replacing it with a deduction indexed to inflation. This is less dramatic than it might appear. The 50 per cent policy was introduced because it was claimed, implausibly, that calculating the effect of inflation was difficult and that using the 50 per cent figure would simplify it.
Goodness knows why; it is not difficult. A simple Google search will tell you that an asset bought in Australia in 2010 would have had its purchasing power reduced by approximately 35 per cent by 2026 because of cumulative inflation. That is fairly close to the 50 per cent discount. Investors who got into the market a long time ago will not be greatly affected, whereas more recent buyers will.
For the purists, removing negative gearing is an unjustified move because, as a general principle, interest costs in, say, a business can be used to reduce tax liability. But for anyone who lives in the real world in Australia, it should have been obvious that negative gearing is the main reason we have a property bubble, and that it had to be brought under control at some point.
Negative gearing, whereby rental losses can be used to reduce tax on other forms of income, is not unique to Australia. Germany, Japan, Canada and Norway all have similar approaches, including allowing unused losses to be carried forward to offset future tax liabilities. Other countries, including the US, have less generous approaches, and the UK has abolished it. The country whose policies are closest to Australia’s is Canada, and its household debt is even worse than ours, at 130 per cent of GDP.
More than a fifth of all residential dwellings in Australia are held by property investors, equating to more than 2.2 million houses. About a fifth of taxpayers own at least one investment property, and they have been receiving about a third of total housing finance. It has become the nation’s favourite financial pastime.
Investors can typically outbid younger buyers because they have collateral from the home in which they live, whereas first-home buyers tend to rely on whatever savings they have cobbled together. That is what is most likely to change with the abolition of negative gearing. First-home buyers will no longer find themselves being outbid by older investors.
“It has rather been the banks’ willingness to lend, especially to investors, that has driven up prices and financialised the whole country, turning a fifth of the population into property gamblers.”
Negative gearing has had a dramatic effect on tax receipts. Approximately $7.4 billion in revenue has been forgone by the government this financial year, which equates to about a quarter of the budget deficit. That figure will not drop quickly, however, because the changes apply only to new purchases. The policy is unchanged for investors who have already bought.
There will be an impact on share investment and cryptocurrency purchases, because the capital gains tax changes apply to any asset. That will increase the incentive to hold shares for longer in order to gain the benefit of inflation indexing.
Politically, the calculation is revealing. The government is breaking its promises from before the last election, which is anything but new. It has probably done so because the main beneficiaries, baby boomers, who bought when prices were far lower, are declining as a proportion of total voters. The last federal election was the first in which Gen Z and Millennials outnumbered Baby Boomers.
This writer can recall running a column more than 20 years ago by Mark Latham in Business Review Weekly in which he argued for the abolition of negative gearing. He was ridiculed from all sides, presumably because at the time it was seen as electoral suicide. That is no longer the case.
Apart from the greater fairness of the policy for anyone under 40, it will at least start to slow the severity of the property-price bubble, which about a year ago reached valuation levels comparable to the peak of Japan’s 1989 property bubble relative to GDP.
Japan’s excesses went down in folklore as the most ridiculous ever seen. It was claimed at the time that the property around the Emperor’s Imperial Palace was worth more than the state of California. Australia has actually surpassed that. Hopefully, we will not have a crash like the one that has kept Japan in permanent recession for 35 years.
Yet again, there is no mention of the real culprit in these excesses: the banks. It has not been a supply-and-demand problem, or the result of high immigration, neither of which explains the extent of the bubble. Property developers do have a disproportionate effect on state governments, and they have manipulated the supply of land. But the idea that there is a shortage of land in Australia is completely risible. Australia is one of the least densely populated countries on Earth, fourth after Greenland, Mongolia and Namibia.
Rather, it has been the banks’ willingness to lend, especially to investors, that has driven up prices and financialised the whole country, turning a fifth of the population into property gamblers. As that effect weakens, banks’ profits are also likely to slow. After all, the reason the banks were so willing to lend is that the bigger the mortgage, the more money they make.
One hopes that as the attractiveness of property investment eases, Australians with money to invest will turn to more productive options, rather than financial manipulation. Financialisation of any sort — the making of money out of money — is, in the end, a dead end that destroys societies.
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