The Urban Development Institute of Australia (UDIA) has warned that any changes to Capital Gains Tax (CGT) in the upcoming Federal Budget risk further constraining housing supply at a time when Australia can least afford it.
Proposed adjustments to CGT were already expected to dampen investment activity. Now, compounding cost pressures, including the recent fuel shock adding an estimated $10,000 to $20,000 to the cost of building an average home, has further eroded project feasibility and investor confidence.
“It is basic economics – increasing taxes on housing reduces supply and undermines the viability of new residential projects,” said UDIA National President, Oscar Stanley.
“As we approach the Federal Budget in May, we urge the Government to abandon any proposed housing tax increases. These measures will deter investment and further choke supply.”
Latest data from the Australian Bureau of Statistics (ABS) shows housing is now the largest contributor to the Consumer Price Index (CPI) – with the housing component rising 7.2 per cent across the 12 months to February 2026, prior to the recent fuel cost escalation. This highlights the compounding pressures of a widening housing shortfall and cost of living pressures.
This inflationary environment also increases the risk of further interest rate pressure from the Reserve Bank of Australia (RBA), placing additional strain on investor’s decision making and overall housing affordability.
Industry is increasingly concerned that without clear support in the Federal Budget, Australia risks a structural loss of building capacity; as civil contractors, developers and builders exit the market.
Increasing taxes on rental housing investment is widely viewed by industry as counterproductive. Each year, approximately 217,000 homes enter the rental market, with more than 53,000 delivered by private investors specifically for renters. This annual contribution alone exceeds the total projected output of the $10 billion Housing Australia Future Fund over its first five years.
“It makes no sense to change the CGT discount, the outcome will be fewer homes built, fewer rental properties and ultimately higher rents,” Mr Stanley said. “Australian families rely on the one housing system for both renting and ownership. While reducing investor participation may ease competition for first home buyers in the short term, it will reduce overall supply over time driving both house prices and rents higher.”
If changes to CGT are pursued against industry advice, UDIA recommends strengthening policy settings to encourage long-term investment in rental housing. For example, extending minimum holding periods from one year to three years would better support stable, long-term rental supply and discourage short term housing speculation.
However, the core issue remains unchanged – Australia is not building enough homes.
“We need to increase supply urgently. New housing delivery is being constrained by limited land availability, slow planning and environmental approvals, restrictive controls, rising construction costs and high property taxes,” Mr Stanley said. “The Federal Government has taken positive steps to boost supply. We now need more of these measures, delivered consistently across the country.”
If tax reform is to play a role, UDIA points to a recent international precedent.
“Canada has recently moved to halve housing-related taxes to stimulate supply. That is the type of reform we should be considering, not increasing the burden on supply,” Mr Stanley said.