Tax Reform Squeezes Investors: Borrowing Power Falls 20%

New negative gearing and CGT rules are already reshaping the property market. Major lenders have cut investor borrowing capacity by up to 20%.

The federal government's changes to negative gearing and capital gains tax have moved from budget announcement to market reality, with major lenders already adjusting how they assess investor loan applications and industry experts warning of a significant exodus from residential property.

New research from valuation and advisory firm Herron Todd White, conducted on 25 June involving more than 500 legal, financial, banking and property professionals, found that 78% of respondents expect the reforms to push residential property values down. Fewer than one in ten believe the changes will do anything to improve housing supply. Australian Broker reports on the findings of this survey and what the shifting landscape means for investors and renters alike.

How the reforms are hitting borrowing power

The most immediate impact for active property investors is at the lending level. CBA, ANZ, NAB, Macquarie and several other major lenders have already tightened the way they factor negative gearing into investor serviceability assessments since the budget. Broker modelling suggests borrowing capacity could fall by as much as 20% in some cases.

That is not a small adjustment. For an investor who previously qualified for a $1 million loan, a 20% reduction in assessed borrowing capacity means their ceiling is now around $800,000. In Sydney and Melbourne, that is the difference between a wide range of investment properties and a much narrower set of options.

The reform changes the core mechanics of how rental property losses are treated. Under the revised negative gearing arrangements, losses can only be offset against rental income rather than against wages or salary. For established investors with profitable portfolios, losses can still be offset against other rental income within the same financial year. For a first-time investor without an existing rental income stream, losses simply accumulate in a pool until the property is sold or becomes positively geared — a process that, according to Hot Property Buyers Agency senior buyers agent Zoran Solano, generally takes up to a decade and is "unfeasible for most new investors given the current low yields and high property prices."

The reform is being described as structurally widening the gap between established investors and new entrants. "The people who benefited most from negative gearing for the past 30 years continue to benefit, but the people trying to use it for the first time don't," Solano said. Baby Boomers and Gen X investors with strong, positively geared portfolios retain the ability to offset losses immediately against existing rental profits in the same financial year. Younger and first-time investors entering the market now do not have this option.

On price expectations, 37.7% of respondents to the Herron Todd White survey forecast values falling between 5% and 10% over the next two years, with a further 12% expecting declines beyond 10%. Only 7.4% anticipate values rising.

Rental market and supply implications

For renters and for borrowers watching the broader property market, the reform has created an uncomfortable second-order effect: rather than improving supply, the changes appear to be reducing the number of available rental properties.

A report cited by Australian Broker found the rental market "has already lost tens of thousands of properties in just three months as landlords sell ahead of the changes." National rents have risen 7.8% year-on-year, with vacancy rates still below 2% in every capital city. The combination of rising rents and tightening vacancy is a difficult dynamic for renters hoping that a pullback in investor activity will eventually open up more affordable purchasing options.

Herron Todd White chief executive Peter Maloney pointed to a specific concern for brokers to flag with investor and first-home buyer clients alike: rather than driving fresh investment into new housing stock, the reforms could place investors in direct competition with first-home buyers for new dwellings. "There is nothing to suggest that investors will suddenly pile in and take advantage of negatively gearing new dwellings to help fuel supply," Maloney said, "and if they did, we now have the perverse equation of first home buyers having to directly compete with investors for new dwellings."

Nearly three in four respondents — 74.5% — believed the reforms would either worsen housing supply or have no material beneficial impact. "Less than one in ten professionals surveyed believe these reforms will improve housing supply outcomes," Maloney said.

What investors and first-home buyers should do now

If you are an existing property investor, the most important step right now is to understand how your lender is applying the new serviceability rules to your portfolio. With CBA, ANZ, NAB and Macquarie having already adjusted their calculations, an investor who pre-qualified six months ago may find that qualification looks materially different today.

A broker can model what your current investor home loan options look like under the revised assessments and, if you are carrying existing debt across multiple properties, identify whether any refinancing strategy could improve your serviceability position or reduce your holding costs.

For first-home buyers, the concern raised by Maloney — that investors may pivot to competing for new dwellings — is worth watching. The most practical response is to understand your own borrowing power clearly and get pre-approval in place so you can move with confidence when the right property comes to market. Knowing exactly where you stand on serviceability, before you start making offers, removes the biggest source of uncertainty in a competitive environment.