Investors are reeling from the shock of major changes to negative gearing and capital gains tax announced in the federal budget, fracturing buyer confidence.
An investor advocacy group warns that investor frustration is rising sharply and concerns are mounting about the impact on future rental supply.
The tax changes have created two distinct buyer groups - those who rushed to purchase before federal budget night, and those who stepped back entirely in anticipation of the reforms, according to the Real Estate Buyers Agent Association of Australia (REBAA).
"Over the past few weeks, we've seen some buyers wanting to purchase quickly, and others have paused, waiting for certainty," REBAA president Melinda Jennison said.
"The divergence has now crystallised, and the federal budget has confirmed the direction many investors feared."
The changes had already influenced behaviour in the market, with many buyers reassessing how and when they invest.
"When the rules shift, buyers naturally rethink their strategy - especially those making long-term investment decisions. When investors step back, rental supply shrinks - it really is that simple," Ms Jennison said.
"If these changes discourage investment, fewer rental homes will be added to the market, and that will push rents higher. Tenants will feel the impact long before the broader market adjusts," she said.
It's understandable that investors are trying to understand how they will be impacted by property changes announced in the federal budget.
The move from the 50 per cent property capital gains tax discount to inflation indexation appears to be a tougher tax treatment for investors, and in some markets, it will be, according to Nerida Conisbee, chief economist, Ray White Group.
"But in a weak housing market with elevated inflation, the opposite can occur. If property values grow slowly, or fall, while inflation remains high, indexation can significantly reduce the taxable gain.
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"That means over the next few years, if inflation remains elevated and price growth weakens, the new system could raise less tax from some property investors selling than the old 50 per cent discount would have," Ms Conisbee explained.
The reason comes down to how the two systems work. Under the current system, investors who hold a property for more than 12 months receive a 50 per cent discount on the capital gain, Ms Conisbee explains.
"Under the new system, investors will instead have their cost base indexed to inflation, meaning they will only be taxed on the gain above inflation. That is a significant change that moves the system from taxing half the nominal gain to taxing the real gain."
The budget's housing tax changes are designed to reduce investor demand for established property, which will weigh on prices.
"We don't know exactly how much that impact will be, but Morgan Stanley has reportedly predicted house prices could fall as much as 10 per cent as investors reassess the after-tax return from residential property. Even if the decline is much smaller, price growth is likely to be weaker than it would otherwise have been," Ms Conisbee said.
Meanwhile, Ms Jennison says investors are likely to return to the market once they have had time to digest the changes.
When it comes to investing, the fundamentals still matter most - location, asset quality, demand, scarcity, cash flow, long-term growth drivers and how the property aligns with the investor's broader goals, Ms Jennison said.
