I hope I buy before I get old (Courting the young generation)

There are different budgets for different times. Sometimes a government needs to tighten its belt and record a solid surplus. Other times, money needs to be handed out to forestall a recession. Despite the turbulence of the war in Iran, this year’s federal budget was the Labor government’s opportunity to make big changes. It has boldly chosen to strengthen the social contract with respect to housing for the younger generation. After today’s budget, housing has moved more toward being a home rather than an investment. While the government could have been even bolder, the budget is still, Jim Chalmers claims, one of the “most ambitious in decades”.

Negative Implications for Property Investors

The announced changes have significant implications for property investors. Property as an asset class is (and will remain) a cornerstone of investment portfolios for many Australian investors. Domestic legislation has long favoured these types of investments, and whilst the changes will come as welcome news to first time buyers, they reduce the appeal of the property sector to prospective and existing investors.

Property as an investment has the appeal of delivering both income and potential capital gains, but the announced changes in the basis of taxation (described in detail below) impact the proportion of any gains that an investor keeps.

For this reason, investors may now consider alternative means of income generation in their portfolio since lower capital gains in net terms will reduce the total returns on offer from a property investment.

Property investors who are negatively geared (expenses are higher than the income that the property generates) will also no longer be able to offset losses against other taxable income - further reducing the appeal for this subset of investors.

Domestic corporate private credit as an investment is one such alternative, generating higher yields via a capital stable investment. Corporate private credit offers gross yields in the range of 12-15% whilst national average property yields sit within the 4-6% range.

In a post budget environment where capital gains on property are impaired, a higher yielding alternative investment in private credit is more relatively attractive.

Helping the young while leaving the Boomers alone  

The two most significant changes in the budget is the abolition of negative gearing for investment properties (new properties exempted) and the reversion of the capital gains tax discount to cost base indexation from the current 50% (which was introduced in 1999). The discount applies when an asset is held for more than one year.

While the two measures (and changes to trust taxation) will increase budget revenue by AUD 8.1 billion in the first four years alone, the government’s main stated motivation was to help more young Australians realise the dream of owning their own home. The measures achieve this by making housing less attractive to investors, ‌increasing the supply available to owner occupiers. The two measures are expected to help an additional 75,000 Australians ‌become first home buyers over the next decade.

“In Australia, the growing sense of alienation and dissatisfaction among younger generations of workers who have found themselves priced out of the property market has become palpable.” Ian Verrender, ABC News.

“In an era where people feel like the system no longer works for them, this budget doesn't just acknowledge that, it acts on it," Jim Chalmers, federal treasurer, budget speech.

Over the last four decades, as house prices have outrun income, home ownership has declined (see the first two charts below). But ownership has declined the most for ‌younger age groups (see third chart below).

Despite its landslide election victory last year, the Labor government only needs to look at the plight of the main conservative party in Australia or the two main parties in England to see what happens when young people believe that traditional parties have broken implicit social contracts around growth, jobs, housing, or the environment.

Treasurer Jim Chalmers has been talking up intergenerational equity for years, and when you look at the chart below, you can see why. In 1995, which was around when negative gearing and the 50% capital gain tax discount were introduced, the Baby Boomers (then aged between 31 and 49) were the largest block of voters. But in 2025, the largest block of voters were the Millennials. Millennials are now aged between 30 and 45 - the median age for first home buyers in Australia is around 34.

However, grandfathering arrangements for negative gearing and the new capital gains tax discount, and exempting negative gearing for new investment properties will lessen the impact on Baby Boomers. The taxes also do not start until 2027. Once again Gen Xers are squeezed in the middle (full disclosure: I was alive for the original Star Wars movies and was in high school when Kurt Cobain died).  

Not a budget for the economic purists, but not terrible

Economic purists (read IMF) would have loved to have seen a faster projected return to a budget surplus. Overall, the 2026-27 budget has moved Australia closer to a surplus in the medium term, but only ever so slightly (see chart below).

However, Australia’s public debt is already very healthy compared to most advanced economies and was largely unaffected by pandemic stimulus (see chart below).

The budget disappoints in terms of productivity. There is talk of dynamism and startups, but no major policy planks.

In addition to increasing access to housing for younger generations, the budget also talks about how the total tax package (including tax cuts in 2026 and 2027, and a $250 per worker annual tax offset starting in 2028) reduces the average tax paid by the average worker (see chart below). Of course, if the government was truly serious about reducing the tax burden on the middle class, it could have introduced indexation for tax brackets rather than relying on occasional tax cuts to reduce tax creep. However, why remove a nice little inbuilt revenue raiser, which allows you to look good with the occasional tax cut! Don’t expect this reform anytime soon.

What will the RBA think?

The budget contains some cost-of-living measures and does generally increase spending over the next few years before announced savings kick in 2029-30; however, the RBA will not be overly surprised.

Final thoughts

Given that Labor won its second-consecutive term last year with a landslide, many expected boldness in this budget - no matter last year’s election promises.

Pre-budget leaks suggested the government was tackling a few bogeymen such as negative gearing and the capital gains discount. Economists have long called for these reforms, but previous governments and oppositions had been too afraid or had been punished by the electorate for even thinking about them.

Treasurer Jim Chalmers has thrown his stone tablets at Australia’s golden idol of investment properties.

Once the tax changes come into force, they will help thousands of Australians ‌buy their first home. They will also direct Australian investors into investing in more productive areas, although Australia’s AUD 4.2 trillion of superannuation assets under management already provide plenty of capital.

A stronger commitment to productivity and to accelerating a return to a budget surplus would have been welcomed by many.

Overall, it is the budget of a healthy economy tackling some longstanding problems with plenty more scope for more good policies in the future.