Why First Home Buyers are Holding Back Despite the 2026 Budget’s Property Tax Changes

By Jarrod McCabe

The federal government’s May budget was intended to make it easier for first home buyers to enter the property market. By reducing the tax advantages available to investors purchasing established homes, the government hoped to remove some of the competition and encourage investment in new housing supply.

I recently explored the broader implications of these changes in an article for the Australian Financial Review. Here, I want to look more closely at what we’re seeing in Melbourne, particularly the unintended consequences for first home buyers.

While investor activity has softened, first home buyers haven’t necessarily stepped into the space they’ve left behind. In Melbourne, we’re seeing buyers who might once have been competing at auctions become increasingly reluctant to make a move.

It raises an important question: does reducing competition actually give first home buyers the confidence to purchase?

What the budget changes are designed to do

From 1 July 2027, investors who purchased established residential properties after budget night on 12 May 2026 will no longer be able to offset rental losses against income such as their salary. They will still be able to offset losses against residential property income and carry unused losses forward. Properties held before the announcement are exempt.

The government is also replacing the 50% capital gains tax discount with an inflation-based approach and a minimum 30% tax rate on gains, with new-build investors able to choose the existing discount instead. These changes likewise begin in July 2027.

The objective is twofold: give first home buyers a better chance of securing established properties, and direct more investor demand towards newly constructed homes.

But property decisions aren’t driven by competition and price alone.

Why first home buyers look for confidence in other buyers

One thing we’ve noticed over many years of representing both investors and first home buyers is just how much first-time purchasers rely on social proof.

Buying a property is usually the largest financial commitment someone has made. They might have spent months inspecting homes and researching suburbs, yet still be understandably nervous about committing hundreds of thousands of dollars.

You see it clearly at auction. First home buyers are often reluctant to make the opening bid. They want somebody else to show their hand first. Once another buyer bids, they’re frequently more comfortable entering the competition themselves.

I’ve often said to clients that if we’re competing against first home buyers, we may need to open the bidding. Otherwise, the auction can struggle to get started.

The point isn’t that every first home buyer behaves this way. It’s that seeing other people prepared to buy gives some of them reassurance about their own decision.

That dynamic also works in reverse. Investors withdrawing, negative commentary and a weakening market can reinforce the view that buying now is risky.

Less competition might look like an opportunity from the outside, but it can also leave an inexperienced buyer wondering what everybody else knows that they don’t.

The rentvesting pathway is becoming less attractive

There’s another consequence that doesn’t receive as much attention. For some first-time buyers, purchasing an investment property has been a stepping stone towards a future home.

Rentvesting can allow someone to continue living with family or renting where they want to live, while buying a more affordable property in an outer suburb or regional area.

The rent helps service the loan and, over time, any equity built up may help them buy a home in a location that better suits their lifestyle.

Negative gearing has been part of the financial equation for some of these buyers, because rental losses could be offset against salary income. The new arrangements reduce that benefit for people buying established properties after the budget announcement.

It doesn’t remove rentvesting as an option. But it changes the calculations for younger buyers who might have used investment as their first entry point into property ownership.

Why falling prices haven’t solved affordability

On paper, a softer property market should help first home buyers. If prices decline and there are fewer investors competing, a buyer might expect their money to go further.

But the wider economic conditions are working against them.

On 3 November, the Reserve Bank raised the cash rate for the fifth time this year, to 4.85%. Higher interest rates affect how much buyers can borrow and what they can comfortably repay. A lower purchase price doesn’t necessarily translate into a more affordable mortgage.

There’s also the risk of buying with very little equity.

The government’s 5% deposit scheme has helped buyers enter sooner, but anyone borrowing a high proportion of a property’s value is more exposed if that value falls. For prospective buyers watching prices decline, that possibility can add to their hesitation.

The market data reflects the softer conditions.

Australian Bureau of Statistics figures show the value of the country’s residential dwelling stock fell by $34.1 billion in the June quarter, the first quarterly fall since September 2022. Victoria was among the states to record a decline.

In August, Westpac reported that first home buyer mortgage applications had fallen 32%, compared with 30% for investors and 18% for other owner-occupiers.

The risk of a market caught in a holding pattern

We’re also seeing a flow-on effect in the properties available for sale. Owners who don’t need to sell may choose to wait rather than accept a price below their expectations. That limits the selection available to the very buyers the reforms are intended to help.

A first home buyer can therefore face an awkward combination: fewer competing purchasers, but also fewer suitable properties, less confidence in where prices are heading and more expensive finance.

Some wait for a better opportunity. Others become frustrated and risk compromising on the property itself simply to get into the market.

It’s too early to attribute all of this to the budget. Interest rates, inflation and wider economic uncertainty are substantial influences in their own right.

But the experience on the ground suggests the relationship between investor activity and first home buyer confidence is more complicated than the policy debate sometimes allows.

Take home message

Removing investors from the established property market may reduce competition for first home buyers, but it doesn’t automatically make them more willing or able to purchase.

If you’re considering your first property, focus on your own circumstances rather than trying to call the bottom of the market. Understand what you can comfortably borrow, allow for further changes in interest rates and take the time to assess the quality of the property.

A quieter market can offer opportunities. The important thing is to recognise an opportunity that genuinely suits your financial position and long-term plans, rather than buying simply because prices have come down.

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