Negative Gearing's apartment trap
Free to all + what matters isn't today's tax incentive, but who wants to buy it tomorrow.
The reaction to the May Federal Budget changes to negative gearing has been predictable.
Many commentators are arguing that investors will now flood into off-the-plan apartments because the tax incentives increasingly favour new homes over established dwellings.
Maybe.
But I think many are looking at the wrong end of the telescope. The fundamental question isn’t what an investor buys today. The fundamental question is who they sell to tomorrow.
A recently released Domain Profit and Loss Report, based on resale activity during the second half of 2025 at what was arguably the peak of the housing cycle, provides an important reminder about what has historically created wealth in Australian housing markets. Houses continue to materially outperform apartments when it comes to realised resale profits.
Across Australia, the median resale profit on a house was $440,000 compared to $228,000 for a unit. In Brisbane, where both housing sectors have performed exceptionally well, the median house resale profit was $580,000 compared to $325,000 for units. Sydney recorded a median house resale profit of $750,000. Even in markets where apartments have surged recently, houses still generated materially larger gains. This matters because most investors do not invest for depreciation schedules or tax deductions.
They invest for capital growth. The tax benefits simply help them hold the asset along the way.
The challenge for many new apartment projects is that they have traditionally been sold to investors and, in many markets, continue to be heavily reliant on investor demand. Depending on the city and project type, investors can account for over two-thirds of apartment purchases, and often more.
That creates a potential problem under the new tax settings.
If an investor buys an off-the-plan apartment today, the tax advantages attached to that new dwelling are available only once. When that investor eventually sells, the apartment becomes an established dwelling. The next buyer no longer receives the same tax treatment.
As a result, the future buyer pool may be materially smaller.
Instead of competing against both owner occupiers and investors, the resale market could become increasingly reliant on owner occupiers alone, particularly for investor-targeted stock in large apartment projects.
That matters because resale values are determined by demand at the point of sale, not at the point of purchase.
In effect, the new tax rules may create a two-tier apartment market. New apartments receive a tax premium. Established apartments do not.
And history suggests that artificial premiums rarely last forever.
There is another issue. Houses are adaptable.
A detached dwelling can often be renovated, extended, reconfigured or modified to accommodate more occupants. Extra bedrooms can be added. Dual occupancy arrangements can be created. Granny flats can be built. Spare rooms can be more easily rented.
In short, there are multiple ways to improve both rental income and underlying value.
Apartments offer far less flexibility. You generally cannot add another bedroom. You cannot build a granny flat. You cannot substantially alter the building envelope. Your ability to manufacture additional value is limited. That leaves capital growth doing most of the heavy lifting.
And when we look at Australia’s long-term housing performance, houses have consistently done more of that heavy lifting than apartments.
None of this means apartment markets will collapse. Far from it.
Many apartment markets are performing exceptionally well today. Brisbane’s apartment market is a standout example, with a record 99.1% of resales generating a profit and a median resale gain of $325,000.
But investors should be careful not to confuse a tax incentive with an investment strategy. They also need to understand that the Brisbane apartment market - as of late 2025 - was at a market peak.
Revisit
A good investment is ultimately determined by what somebody else is willing to pay you for it in the future. And that future buyer pool may have become much smaller than many apartment investors currently assume.
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Over recent months we’ve taken a deeper look at the issues that sit behind today’s apartment versus house debate. We’ve explored the likely impact of the Federal Budget’s negative gearing changes, why investors overwhelmingly buy established housing, whether Australia is actually as undersupplied as many claim, how housing demand is changing through migration and household formation, and why the next decade may deliver very different investment outcomes to those of the past twenty-five years.
The common thread is simple: housing markets are changing.
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