Property prices may need to fall 27% to offset negative gearing rule changes

The federal budget decision to eliminate negative gearing for established properties has set off a chain reaction through Australia's investment housing market, and the numbers suggest there is no painless way out. A new analysis from Ray White attempts to quantify what happens next, and the answer depends on which group bears the cost: investors, property owners, or tenants.

Investor activity has already begun to retreat. In the three months following the May budget announcement, new investor loan commitments fell 8.6 percent, while the total value of lending to property investors dropped 10.2 percent. The market is signaling that the rule change has made rental property less attractive, at least for now. The current gross rental yield across Australia's capital cities sits at 3.95 percent—a figure that Ray White's analysis suggests is no longer sufficient to justify the investment under the new tax regime.

To understand what needs to shift, consider what an investor on the top marginal tax rate would require to compensate for the loss of negative gearing deductions. Assuming an 80 percent loan-to-value ratio, a mortgage rate of 6.5 percent, and operating costs equal to 20 percent of rental income, the required yield jumps to about 5.15 percent. That's a gap of 1.2 percentage points—and closing it requires dramatic movement somewhere in the market.

Ray White chief economist Nerida Conisbee laid out the scenarios. If property prices stayed exactly where they are, rents would need to climb roughly 30 percent from current levels to reach that 5.15 percent threshold. Alternatively, if rents remained flat, prices would need to fall about 23 percent. But the picture darkens when you consider what it would take to make an investment truly self-funding—where rental income, after costs, actually covers the mortgage interest. That requires a gross yield of about 6.5 percent. Even if rents rose 20 percent, property prices would still need to fall approximately 27 percent to reach that point.

The burden falls unevenly across the country. Brisbane, currently yielding just 3.5 percent, would need a 32 percent price correction if rents stayed flat. Sydney, at 3.7 percent, would need roughly a 28 percent drop. Melbourne is in a better position—its 4.5 percent yield means rents need only rise 12 percent or prices fall 11 percent to hit the investment hurdle. Darwin stands apart entirely, already yielding 6.4 percent, nearly at the self-funding threshold without any adjustment needed.

What makes this genuinely difficult is that the adjustment cannot happen in isolation. Conisbee suggested the market will likely move on both fronts simultaneously: slower investor demand will moderate price growth, while constrained rental supply will support higher rents. The combination, over time, should lift yields enough to make property investment viable again. But this is cold comfort to tenants already feeling the squeeze. National advertised rents have climbed 7.2 percent year-on-year, with the capital city average now at $796 per week. SQM Research founder Louis Christopher noted that while some markets like Sydney show signs of easing, most capitals—Brisbane, Perth, and the smaller cities—continue to report very tight rental availability. The pressure on tenants is real and immediate, even as the market searches for its new equilibrium.