Changes to negative gearing and the capital gains tax (CGT) discount have fundamentally shifted the landscape for investors and prompted many to rethink their purchasing plans.
From 1 July 2027, negative gearing for residential property investments will be limited to new builds, while the 50 per cent CGT discount will be replaced with cost-base indexation and a 30 per cent minimum tax rate on capital gains. Against this backdrop, new investor loans fell by 8.6% in the June quarter, with their value declining 10.2%.
At the same time, property values have softened across many Australian markets. Tax changes, geopolitical uncertainty, and interest rate hikes have weighed on sentiment. National house prices are now forecast to decline by 1.1% in 2026, while unit prices are expected to increase by 2.2%.
But property investors aren’t looking at prices in isolation. Rental demand remains strong and vacancy rates are low in many parts of the country, supporting rental returns even as capital growth slows.
Successful property investing is about understanding the full picture, including rental demand, cash flow, supply, and tax considerations. And with the market changing, many investors are pivoting their strategies accordingly.
Rental market conditions remain strong
While conditions have softened for buyers and property prices have eased, Australia’s rental market remains under pressure.
Despite moderating population growth and migration, Australia’s rental market conditions remain tight. National vacancy rates are low, at 1.3% as of July 2026, and total rental listings are 16.7% below the five-year average.
In practical terms, renters are still competing for a limited pool of properties in many parts of the country. This has helped keep upward pressure on rents, even as broader housing market conditions have weakened.
According to KPMG, rental growth is expected to track above its long-term average through the remainder of 2026, underpinned by supply shortages.
For investors, this means rental returns could continue to provide support at a time when capital growth has slowed. For prospective buyers weighing up whether to rent or purchase, persistently high rents might also remain an important consideration.
What about gross rental yields?
Gross rental yield is a measure that investors consider when deciding whether to buy a property. It’s a percentage that shows the property’s annual rental income, compared to its purchase cost or value (whereas net rental yield factors in expenses associated with owning the property).
With rents increasing and home values declining, gross rental yields are trending higher. National gross rental yields reached 3.79% in August, the highest level since September 2019, according to Cotality. Yields are significantly higher in some of the smaller capital cities, reaching 6.3% in Darwin and 4.4% in Hobart, for example.
This reflects a broader shift in the market. As capital growth slows and rental demand remains strong, many investors are placing greater emphasis on rental income and cash flow when assessing property opportunities. For some, stronger yields could help offset some of the challenges created by higher borrowing costs and changing tax settings.
What all this means for investors
Given the current market conditions and changes to tax settings, many investors are placing greater emphasis on rental yield, rather than focussing solely on capital growth.
Loss-making established investment properties no longer have the same tax advantages they once did, while investors who accept short-term negative cash flow in the hope of long-term capital growth may ultimately face a higher CGT bill.
These changing priorities could influence the types of properties investors choose to buy. Areas where rents remain strong relative to property values, including some regional markets and more affordable outer-suburban locations, may attract increased attention. Units and apartments may also appeal to yield-focused investors, as they often offer stronger rental returns relative to their purchase price than detached houses.
For investors entering the market this spring, understanding both the income and growth potential of a property could be more important than ever.
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