When the Reserve Bank raises interest rates, it usually leads to a decrease in property values.
Higher rates often mean that people borrow less to buy property, which reduces the overall pool of funds available for any given property.
On top of this, state governments have increased land taxes and imposed stricter regulations on rental providers. Meanwhile, inflation has driven up the cost of almost everything.
So, why haven’t we seen a significant drop in the property market?
Let’s explore the factors that are currently putting pressure on the property market and how these elements might influence investing in 2026.
Negative Gearing and Capital Gains Tax Reform.
From 1 July 2027, the Government will:
- Limit negative gearing for residential property investments to new builds
- Replace the 50% CGT discount for individuals, trusts, and partnerships with cost base indexation and a 30% minimum tax rate on capital gains.
Historical background of removing negative gearing:
In July 1985, the Hawke Labor Government effectively abolished negative gearing for all future rental property investors.
When negative gearing was briefly removed, investors reacted by raising rents to “replace the lost income” negative gearing had provided.
The Hawke Government reinstated full negative gearing in 1987.
If history repeats itself, negative gearing could be reinstated with a new government in two years’ time (2028) or if rents increase too much. In the meantime, higher rents could make investing in property more attractive for cash-rich buyers due to higher returns.
A problem with supply.
Net migration will grow by 990,000 over the four financial years to July 2029.
A total of 55,000 more migrants are expected over this financial year and the next than previously estimated, the federal budget has revealed.
The constrained supply aspect often plays a significant role in property market dynamics. If there’s a shortage of available housing, it can put upward pressure on prices as demand outstrips supply.
The decision by the Albanese Government to welcome new migrants by mid-2029 signifies a substantial shift in Australia’s ability to supply new housing.
The warning from Infrastructure Victoria about the need to build 44,000 new homes annually in Melbourne underscores the pressing challenges posed by population growth. Accommodating an additional 3.1 million people by 2051 is a substantial task that requires careful planning and execution, particularly in the realm of housing.
However, the concern raised by SQM Research managing director Louis Christopher regarding the impact on the housing market is notable. With Melbourne already grappling with ultra-low rental vacancy rates, a surge in immigration could further put upward pressure on property prices.
Patience for better interest rates?
If you’re watching mortgage rates, holding off could still be a smart strategy. Rates are a major factor in the overall cost of owning a home, so waiting for a more favourable rate could save you significant money over time.
Rates climbed steadily throughout 2022 and 2023, with many expecting them to ease alongside inflation by late 2024. While inflation has since eased, it hasn’t yet reached the Reserve Bank’s 2.5% target, which is why interest rates remained relatively high through 2025.
Looking into 2026, economists and the big four banks are forecasting an increase in interest rates. This could create a less favourable environment for buyers, making it an opportune time for those prepared to enter the market and secure a mortgage at higher rates. Patience now may pay off next year, both in affordability and long-term investment potential.
The elephant in the room, inflation.
How Melbourne’s New Land Tax Rates Are Shaping Investment Strategies
In 2024, many suburbs across Melbourne have seen little to no capital growth, with some areas experiencing a decline of around 5%.
As a result, many Melbourne investors are selling their properties, and auction clearance rates are falling. What has caused such a shift in what was once considered the world’s most liveable city?
The 2020s have been challenging for Victorian property investors. They endured some of the world’s longest lockdowns, faced rising inflation, and have seen 13 consecutive interest rate hikes. Additionally, new legislation now mandates minimum standards and regular safety checks for rental properties.
The situation was further exacerbated when the Andrews Government introduced a temporary land tax surcharge in 2024, intended to address COVID-19 debt. This surcharge, added to the existing land tax, will be in effect for 10 years.
For example, if your property is valued at $1.6 million with the land component worth approximately $1.2 million, your land tax bill would now be around $15,450 per year. Over 10 years, if property values increase, you could end up paying more than $154,000 in land tax alone.
Investors with inner-city properties where the land value exceeds $3 million are now facing annual land tax bills exceeding $30,000.
| Total taxable value of land holdings | Land tax payable |
| < $50,000 | Nil |
| $50,000 to < $100,000 | $500 |
| $100,000 to < $300,000 | $975 |
| $300,000 to < $600,000 | $1350 plus 0.3% of amount > $300,000 |
| $600,000 to < $1,000,000 | $2250 plus 0.6% of amount > $600,000 |
| $1,000,000 to < $1,800,000 | $4650 plus 0.9% of amount > $1,000,000 |
| $1,800,000 to < $3,000,000 | $11,850 plus 1.65% of amount > $1,800,000 |
| $3,000,000 and over | $31,650 plus 2.65% of amount > $3,000,000 |
Owning multiple properties under this new tax regime can be particularly burdensome, especially in an environment of high interest rates and inflation. This is why many Melbourne investors are choosing to exit the market.
Given these factors, it’s clear that the Melbourne property market is undergoing a significant rebalancing of wealth.
Buy now or wait?
A Melbourne apartment in 2026 could be a solid long-term hold for someone with solid finances and a long investment horizon, provided you do thorough due diligence and model potential returns under different scenarios.
However, softening prices due to increasing inflation and subsequently interest rates, potential changes to tax incentives mean you should proceed cautiously and with professional advice.
