NEGATIVE GEARING, CGT, AND THE FEDERAL BUDGET: WHAT'S ACTUALLY TRUE?

It's that time again. The Federal Budget is around the corner (mark Tuesday 12 May in the diary), and like clockwork, the housing tax debate is back. Negative gearing is "the reason young people can't buy." The CGT discount is "a handout to investors." Scrap them both and, apparently, the housing crisis disappears overnight.

If only it were that tidy.

At Ethel + Florence we spend our days walking buyers and sellers through the *actual* mechanics of property, so when the same myths get recycled every Budget, we think it's worth pausing for a reality check. Here's what the numbers, and a bit of history, actually say.

Is Australia really the only country with negative gearing?

You'll hear this one a lot. It's also wrong.

Germany, Japan, Canada and Norway all let investors offset rental losses against their broader income, much like we do. The US, Ireland and France allow losses to be carried forward against future rental income. Spain and Sweden sit somewhere in between, allowing rental expenses to reduce tax. Australia isn't an outlier. We're sitting comfortably inside the international pack.

So what is negative gearing, in plain English?

You borrow to buy an income-producing asset. If the income (rent, in housing's case) doesn't cover the costs such as interest, rates, insurance and maintenance, you're running at a loss. In Australia, that loss can be deducted against your other income, usually your wages.

Two things worth remembering: it isn't unique to housing (shares and commercial property work the same way), and because the deduction is more valuable to higher earners, it skews toward higher-income investors.

How big is it really?

Around 1.1 million Australians report rental losses each year. Treasury estimates the policy costs the federal budget somewhere around $6 to $7 billion in forgone revenue annually. So roughly one in nine taxpayers is involved, which is why every politician treats this issue like a live wire.

Didn't rents explode last time we touched it?

This is the ghost story that gets dragged out every reform discussion: negative gearing was scrapped between 1985 and 1987, rents allegedly skyrocketed, and the sky fell in.

The fuller picture is less dramatic. Vacancy rates actually rose nationally during that window, climbing from about 2.2% to 4.4%. Yes, rents lifted in some capitals, but the cash rate at the time was pushing toward 20%, mortgages were sitting around 17 to 18%, and developers were borrowing at eye-watering levels. Construction stalled and landlords pushed rents up because the cost of money had gone vertical, not because of a tax tweak.

What about the Capital Gains Tax discount?

Here are the three CGT claims you'll see most often in Budget week, and what the evidence actually suggests.

"The CGT discount is a special deal for property." It isn't. The 50% discount applies across shares, managed funds, commercial property, business assets, goodwill, and even some crypto and collectables. Treasury puts the total cost at around $22 to $23 billion a year, with residential housing accounting for roughly half. That reflects the sheer size of our housing market, not a special carve-out.

"Lifting CGT would flood the market with homes." Intuitively appealing, economically backwards. Higher capital gains taxes tend to produce a lock-in effect, where owners hold longer to defer the tax bill rather than sell and crystallise it. International research consistently shows higher CGT reduces turnover. Real new supply still comes from construction, not from reshuffling the tax on existing homes.

"The 1999 CGT discount caused the 2000s housing boom." Tidy story, but the same boom played out across the US, UK, Canada and New Zealand, none of which made the change. What those markets did share was falling interest rates, rising incomes, lower unemployment, easier credit and longer mortgage terms. When borrowing capacity rises, prices follow. Tax tweaks rarely override that.

So what would actually move the dial?

If the goal is more housing rather than just more tax revenue, there's a reasonable case for steering investor activity toward new supply instead of bidding up existing stock. Ideas like replacing stamp duty with a broad-based land tax, limiting negative gearing and the CGT discount to newly built homes, and channelling the savings into social and community housing all sit in serious policy circles for a reason.

But the honest takeaway is this: even meaningful tax reform would likely have a modest effect on prices and rents on its own. Housing markets are driven first by credit conditions (how much you can borrow and at what rate) and supply (how many homes get built). Tax policy nudges behaviour at the edges. It doesn't run the show.

What this means for buyers and sellers

If you're buying, selling or investing this year, don't make decisions based on Budget-week headlines or talkback panic. The fundamentals you should actually be watching are interest rates, borrowing capacity, local supply pipelines, and your own time horizon.

That's the lens we use, and it's a far more reliable guide than whatever myth is trending on Tuesday night.

Data points and the 1985 to 1987 case study referenced from Michael Matusik's "Taxation Myths Versus Reality" (April 2026). Worth a read if you want to go deeper.