Labor's Tax Reforms Threaten Rent-Vesting Strategy for Young Australians
Under the tax changes announced in the federal budget, Australians buying investment properties will lose access to negative gearing from July 2027, making 'rent-vesting' less attractive, experts say. Rent-vesting, a popular strategy among young Australians saving for their first home, involves renting in a preferred area while buying a cheaper property elsewhere, hoping it will appreciate in value. However, higher capital gains tax and tighter restrictions on negative gearing are expected to diminish its appeal.
Impact on Young Buyers
Domain's chief economist, Dr Nicola Powell, warned that the changes would delay the journey to homeownership for many. 'Rent-vesting is all about building up equity and releasing that gain to eventually put into a home you want to live in yourself,' she said. The typical Australian home now costs eight times the typical income, and saving a 20% deposit takes 11 years. The reforms aim to reduce investor competition and are projected to help 75,000 extra renters buy their first home over the next decade, while leaving house prices 2% lower than otherwise.
Rent-Vesting in Practice
Since July 2019, nearly 53,000 Australians have entered the housing market by buying an investment property, with a third in New South Wales, the least affordable market. Ry Atkinson, a Sydney renter, and his wife Sophie bought a house 1,200km away in Hervey Bay, Queensland, hoping to sell it later to buy in Sydney. Despite the tighter capital gains tax, Atkinson supports the reform, saying 'something does need to change.'
Financial Implications
Most young rent-vestors spend more on loan repayments than they earn in rent, relying on negative gearing to deduct losses. While current investors retain access, new buyers after the budget will lose negative gearing from July 2027. Brendan Dixon of Pure Finance noted that banks would reduce lending to new investors, making rent-vesting more difficult. Shadow treasurer Tim Wilson argued the reforms harm young Australians by increasing taxes on investment strategies.
Future of Rent-Vesting
Despite the changes, Samuel Power of Loan Market believes young people will still seek rent-vesting opportunities due to persistent housing supply shortages and high prices. 'Restricting negative gearing to new builds increasingly locks younger buyers out of the same pathway,' he said. The strategy is used by a small share of market entrants, with 7,000 new rent-vestors in the year to March, compared to 120,000 new first home buyers.
