Treasurer Jim Chalmers was warned before the federal Budget that Labor’s sweeping changes to negative gearing and capital gains tax would put upward pressure on rents and reduce housing supply, newly released Treasury documents have revealed.

The confidential modelling, released under freedom of information laws this week, provides a clearer picture of the trade-offs Treasury expected from one of the Albanese government’s biggest tax reforms.

The documents do not predict a collapse in rental supply or a dramatic surge in rents.

They do, however, confirm that Treasury expected both outcomes to move in the direction critics of the reforms had warned about.

According to the modelling, lower after-tax returns would reduce investor demand for housing, contributing to slower house-price growth.

At the same time, Treasury expected housing supply to be slightly lower than it otherwise would have been and investor costs to rise, placing what it described as “modest upward pressure” on rents.

Rents were estimated to be about 0.25 per cent higher as a direct consequence of the policy, with the increase beginning soon after the new negative-gearing arrangements take effect.

Treasury said the supply effect would be small and would emerge over roughly a decade.

The disclosure is politically significant because Labor has repeatedly presented the reforms as part of a broader plan to make housing more affordable and give first-home buyers a greater chance of competing against investors.

The government maintains that the benefits to prospective homeowners and additional supply measures in the Budget outweigh the comparatively small rental and construction impacts identified in the modelling.

What Treasury told the government

The FOI release, titled “Housing modelling”, was published by Treasury on September 7 and contains heavily redacted material prepared around the government’s housing tax reforms.

The unredacted sections are nevertheless unusually direct.

Treasury said the policies would reduce after-tax returns for investors and put downward pressure on house prices.

It expected the reduction in investor demand to produce a “modest and temporary” slowing in housing-price growth, with most of the impact occurring relatively soon after the policy announcement.

The government’s Budget material subsequently quantified that effect as prices growing by around two per cent less over a couple of years than they would have under a no-policy-change scenario.

That is an important distinction.

Treasury was not forecasting that national home prices would necessarily fall two per cent.

It was modelling the difference between two possible paths. If prices would otherwise have increased, for example, the reforms could mean they increased more slowly.

The same distinction applies to rents.

The modelling did not say Australian rents overall would rise by only 0.25 per cent. It estimated that rents would be about 0.25 per cent higher than they otherwise would have been because of the reforms.

Budget documents translated that estimate into an expected increase of less than $2 per week for a household paying the then-current median rent.

Treasury also expected housing supply to fall

The most politically sensitive line in the documents concerns construction and rental supply.

Treasury said “modestly lower housing supply and higher costs for investors” would place upward pressure on rents.

It also explicitly stated that housing supply would be lower under the policy changes.

But the department repeatedly described the effect as small.

Unlike the faster impact expected on investor demand and house prices, the supply effect was projected to build gradually over approximately 10 years.

Treasury argued the design of Labor’s policy deliberately limited that damage by preserving tax incentives for new housing.

Investors buying qualifying new builds can continue to negatively gear those properties, while eligible new residential dwellings retain access to more favourable capital gains tax treatment.

The intention is to redirect investor demand away from established properties and towards construction that genuinely adds another dwelling to Australia’s housing stock.

That design explains why the government rejects claims that it simply abolished negative gearing.

It did not.

Labor has restricted where the concession can be used for future residential property investment, while grandfathering properties acquired before the Budget announcement.

The reforms are now law

The changes were announced in the May 2026 Budget and subsequently passed Parliament.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 and the accompanying Income Tax Rates Amendment legislation received Royal Assent on June 26.

From July 1, 2027, negative gearing on residential properties will generally be limited to eligible new builds for new investments.

Established investment properties already held before 7.30pm on May 12, 2026 are grandfathered and can continue under the existing arrangements.

For affected established properties purchased after the cut-off, rental losses will no longer generally be deductible against unrelated salary or wage income after the new regime begins.

The losses can instead be offset against residential property income and relevant capital gains, with unused amounts capable of being carried forward.

Labor’s capital gains changes are broader.

The existing 50 per cent CGT discount for many individuals, trusts and partnerships is being replaced with inflation-based cost-base indexation for gains accruing from July 1, 2027, together with a 30 per cent minimum tax on relevant real capital gains.

The family home remains exempt from CGT, while special arrangements apply to new housing, affordable housing and other categories.

Government says 75,000 more homes will shift to owner-occupiers

Labor’s central defence is that reduced investor participation in the established market is not an accidental side effect. It is part of the policy objective.

Treasury estimates the reforms will increase the owner-occupier share of Australia’s housing stock by around one percentage point over the medium term.

That equates to approximately 75,000 additional homes being owned by owner-occupiers rather than investors over the next decade compared with the baseline scenario.

The government says that shift would effectively reverse about a decade of decline in Australia’s home-ownership rate.

Chalmers has argued that the tax system had increasingly encouraged investors to compete with first-home buyers for established properties rather than directing enough capital towards new construction.

Labor’s answer is therefore to make established investment housing less tax-advantaged while preserving incentives to fund new supply.

The difficult policy question is what happens to renters during that transition.

A home sold by an investor to a first-home buyer does not disappear from the housing stock, but it does move from the rental market into owner occupation.

At the same time, the former renter who buys it also leaves the rental market.

Treasury’s model attempts to capture those competing movements and concludes that rents still rise slightly compared with the no-reform scenario.

Labor says other housing measures will more than offset the supply hit

The government has always presented the tax reforms as only one component of a much wider housing package.

The 2026–27 Budget includes a $2 billion Local Infrastructure Fund intended to help councils and state utilities deliver roads, water, sewerage, electricity and other infrastructure needed to unlock new development.

The government estimates that fund could support up to 65,000 homes over the decade.

Budget documents explicitly acknowledge that the tax measures themselves have a small negative effect on housing supply but say this will be more than offset by other measures designed to increase construction.

Treasury made the same argument in its internal modelling, stating that the modest supply impact could be offset through land-use reforms, regulatory changes and other government housing initiatives.

That makes the success of the broader supply program critical.

If new construction arrives as forecast, the government’s argument is that Australia can gain more owner-occupiers while containing the effect on renters.

If supply initiatives underperform, the adverse side of Treasury’s modelling becomes more important.

The modelling comes with major caveats

Treasury itself cautioned against treating its numbers as precise predictions.

The FOI documents state that the modelling is subject to “significant uncertainty”.

The department noted that Australian studies examining similar tax changes have produced a wide range of outcomes depending on how policies and economic responses are modelled.

Treasury also said its estimates for dwelling stock and rental prices sit at the lower end of comparable studies, partly because Labor’s policy was deliberately designed to preserve incentives for new supply.

The model captures average economy-wide effects rather than detailed results for individual suburbs, households or property types.

It does not separately predict what could happen to a renter in inner Sydney compared with a renter in regional Queensland, nor does it attempt to model every apartment and detached-house market independently.

Those qualifications have become more important because Australia’s housing market has weakened much faster in recent months than it was moving at Budget time.

Property downturn has accelerated

Cotality’s latest Home Value Index showed national dwelling values falling 0.9 per cent in August, marking the fifth consecutive monthly decline.

National values were 3.6 per cent below their March peak.

Housing weakness had also spread dramatically across the capitals, with 93 per cent of capital-city suburbs recording falling values through winter.

Sydney was leading the decline, with values down 1.4 per cent in August and 7.1 per cent below their February peak.

Melbourne and Canberra also recorded substantial monthly falls.

There is no basis for attributing that entire downturn to Labor’s tax reforms.

Australia has experienced three Reserve Bank rate increases during 2026, borrowing capacity has deteriorated, household confidence is weak and affordability had already become severely stretched.

Cotality and independent economists have described the downturn as the result of several pressures accumulating at the same time.

The tax changes are one of those pressures, not the only one.

That distinction is crucial because Treasury’s modelling was designed to estimate the incremental effect of tax policy while holding other economic relationships within its model.

Real housing markets do not experience policy changes in isolation.

FOI release changes the political argument

For the Coalition, the documents provide an obvious attack line.

Opposition figures can now point to Treasury’s own advice showing the government knew its tax package involved higher rents and slightly lower housing supply before the measures were announced.

For Labor, the same documents support a very different interpretation.

The government can point out that Treasury described those negative impacts as modest, while forecasting lower barriers to home ownership and a substantial shift from investor ownership to owner occupation.

Both descriptions can be true.

The reforms can help some first-home buyers while imposing a small additional cost on renters.

They can reduce investor demand for established homes while also slightly reducing the total quantity of housing that would otherwise be supplied.

The ultimate judgement therefore depends less on whether Treasury identified trade-offs — it clearly did — and more on whether the benefits Labor promised prove larger than those costs.

That test will take years rather than months.

For now, the newly released documents settle one question.

Before the Budget was delivered, Treasury had already told the government that restricting negative gearing and changing the taxation of investment returns would not produce a completely cost-free housing transition.

Labor proceeded because it believed the effect on rents and supply would be small, the effect on home ownership worthwhile, and its broader construction policies sufficient to offset the loss.

With Australia’s property market now falling and renters still facing an extremely tight market, those assumptions are receiving far more scrutiny than they did on Budget night.