Will abolishing negative gearing crash the market?

Ever feel like the Australian property market is a game of snakes and ladders? One minute you’re scaling the board, the next you’re sliding back, and everyone’s blaming the dice. Lately, the dice in question is negative gearing. It’s become the punchline of every dinner party conversation and the subject of endless op-eds. But if we scrapped it tomorrow, would house prices plummet? Or is the panic overblown?

Let’s break it down from a marketer’s perspective into simple, actionable and no fluff.

Negative gearing: incentive or scapegoat?

To recap: negative gearing allows investors to offset any rental losses against their overall income. Tax concessions like this, combined with the 50 % capital-gains tax discount, cost the government billions annually australiainstitute.org.au. A fair few critics argue that it fuels investor demand for existing homes, bidding up prices and locking out first-home buyers.

But here’s the million-dollar question: does it create a bubble just waiting to burst? Or is it simply one of many factors?

What the data actually says

Plenty of speculation has made negative gearing the villain. Treasury data shows that about 2.3 million Australians declared rental income in 2021–22 and about 950,000 of those made a loss. Moreover, more than two-thirds of tax benefits are enjoyed by the top 10 % of earners australiainstitute.org.au, which raises equity issues but doesn’t automatically prove a price contagion.

Economists and think tanks have modelled what could happen if negative gearing is abolished. The Grattan Institute’s influential 2016 Hot Property report found that limiting negative gearing to new housing and reducing the capital-gains tax discount from 50 % to 25 % would reduce house prices by up to 2 % grattan.edu.au. That’s not a typo—two per cent. Since that report, prices have surged more than 50 %, so a 2 % drop is relatively small grattan.edu.au.

Reserve Bank modelling agrees. Trent Saunders and Peter Tulip, in RBA Research Discussion Paper 2019-01, noted that negative gearing and the CGT discount “may boost the level of housing prices by about 2 %” rba.gov.au. They stressed that interest rates and supply constraints drive far greater price swings rba.gov.au.

A newer study by University of Melbourne economists Cho, Li and Uren sheds more light. Their model suggests eliminating negative gearing would reduce housing supply by 1.8 % and increase rents by 2.5 %. They highlighted that removing negative gearing without redistributing the tax savings would yield only a tiny welfare gain—about 0.13 %—because negative gearing provides a form of insurance for investors austaxpolicy.com.

Now here’s the kicker: separate modelling by NSW Treasury predicts that curbing these concessions could raise the home-ownership rate by three percentage points, from 67 % to 70 %. Sounds promising, right? But this change is marginal in the face of Australia’s broader housing supply shortage and skyrocketing migration.

Interest rates and supply: the real culprits

It’s easy to fixate on tax policy. But if we’re honest, the single biggest factor driving housing prices is the cost of borrowing. From 2011 to 2019, the RBA gradually slashed the cash rate, which turbocharged demand. The RBA’s own model estimates that lowering interest rates accounts for most of the boom in dwelling prices and investment rba.gov.au.

Supply constraints matter too—far more than we’d like to admit. Peter Tulip, now chief economist at the Centre for Independent Studies (CIS), argues that planning restrictions and zoning rules can inflate prices by 30–50 %. Compare that with negative gearing’s 1–4 % price effect cis.org.au and you start to see where the bigger problem lies.

Will it crash the market?

Let’s address the elephant in the room: could abolishing negative gearing precipitate a housing crash? The short answer: highly unlikely.

1. Modest price impact
   Most credible modelling agrees that changes to negative gearing would shave a few per cent off dwelling values grattan.edu.aurba.gov.au. “Crash” implies a double-digit collapse. That’s not on the cards based on the best evidence.
2. Investor reallocation
   Investors could pivot to other assets if the tax concession is removed. Yet with superannuation, shares and managed funds also struggling to produce high returns, property remains attractive for many. The University of Melbourne study warns of a slight reduction in supply and higher rents. But when investors sell, those properties usually end up with owner-occupiers, not disappearing into thin air.
3. Policy design matters
   Grattan proposes restricting negative gearing to newly built dwellings and phasing in changes grattan.edu.au. Such a transition would minimise market shocks and focus investors on adding to supply rather than chasing capital gains in existing stock. Other proposals, like capping deductions for highwealth investors or phasing in a lower CGT discount, would ease speculation while protecting small investors ahuri.edu.au.
4. Interest rate environment
   If negative gearing were abolished in a high-interest-rate environment, you’d expect minimal price impact. Homebuyers are already stretched by borrowing costs; an extra 2 % discount from tax reform is hardly going to change behaviour. Conversely, if interest rates fall again, prices might rise despite tax changes.

Equity considerations

Where the debate heats up is on fairness. Is it fair that more than two-thirds of the tax benefits flow to the top 10 % australiainstitute.org.au? Should the government give up $20 billion each year to subsidise investors when housing affordability is in crisis?

Critics, including the Australia Institute, say negative gearing encourages speculation and squeezes out first-home buyers australiainstitute.org.au. They argue that redirecting billions in revenue into social housing or rental assistance is a better use of taxpayer funds. Meanwhile, defenders point out that negative gearing encourages investment in rental housing, which still provides supply, and that eliminating it could exacerbate rental shortages.

There’s truth on both sides. But the distributional tilt is clear: the majority of benefits go to well-off households. From a policy perspective, targeted reforms—such as limiting deductions for wealthier investors—could free up funds for public housing without destabilising the market.

Rents: what about tenants?

Here’s another rhetorical question: if negative gearing goes, will rents skyrocket? The University of Melbourne study anticipates a 2.5 % rent rise. That’s not insignificant, especially amid a cost-of-living squeeze. But it’s also modest compared to the typical annual rent increases we’ve seen lately.

Grattan’s John Daley and Danielle Wood have long argued that negative gearing reforms could be coupled with increased rent assistance or social housing to offset any rent pressure grattan.edu.au. Cho and colleagues go further: they conclude that if the revenue saved by ending negative gearing is recycled into rent assistance for low-income households, overall welfare can rise by 1.45 % austaxpolicy.com. That’s a big step forward.

Marketing insights for investors

So what does this all mean if you’re a property investor or a buyer using the Property Dollar app?

• Don’t panic: Policy changes to negative gearing are unlikely to crash the market. Evidence points to small, managed price shifts, not dramatic collapses.
• Watch the rental market: If negative gearing is curtailed, rents might creep up. Investors could weigh that risk against the prospect of losing a tax offset.
• Consider new builds: Future reforms may target existing stock but still permit negative gearing on newly built homes—an incentive to supply rather than speculate.
• Diversify: It never hurts to diversify into other assets. But given property’s enduring appeal and the persistent supply imbalance, real estate will remain a pillar of wealth strategies for most Australians.

Final take

As marketers, we know narrative matters. Removing negative gearing has become a political and media flashpoint because it’s easy to digest. “Ban negative gearing” is a catchy slogan. But the reality is more nuanced. Evidence suggests that abolishing or restricting negative gearing will not send prices plunging. Instead, it would nudge the needle—a small decline in purchase prices grattan.edu.au, a slight increase in rents, and a modest rise in home ownership.

The bigger levers are interest rates, planning regulations and supply. That means if we’re serious about making housing more affordable, we need a broader reform agenda: encourage more building, streamline planning, invest in social housing, and get interest rates right. Negative gearing, while politically symbolic, is only a small part of a much larger equation.

Is the political will there to fix the structural issues? That’s another question entirely—maybe one for your next blog post.