Safe as houses: how property tax reform could re-rate the share market

The proposed changes to negative gearing have reignited a familiar debate about fairness, housing, and the direction of policy. But for investors, the more important question is not: Are the changes are good or bad? It’s where will capital flow next, and which assets could benefit if the investment case for residential property weakens?

That question matters because the Australian residential property market is enormous. The Australian Bureau of Statistics estimates its value at more than $12.7 trillion[1], and a May 2026 MacroBusiness study suggests that roughly 27% of that is owned by investors[2]. On that basis, around $3.4 trillion of property could be affected by the proposed tax changes.

For decades, residential property has offered investors two major advantages. The first has been the tax benefit of negative gearing. The second has been the long-term capital appreciation of property values. Hence the term ‘Safe as Houses’. If those incentives change, the economics of property investment change with them.

Where the money goes next

Commercial property

The natural assumption is that capital might simply move into commercial property. But commercial property is far from a perfect substitution.

Commercial property is more complex, more specialised, and often more expensive to access. A single asset can be beyond the reach of many investors. Vacancy risk is also materially higher, and commercial property has not historically delivered the same capital growth that residential investors have come to expect.

Looking at Cotality’s Home Value Index (to March), residential property has risen by around 9% nationally this year and by almost 6.5% per annum over the past 30 years[3]. Add rental income of about 2% per annum and the total return comes to roughly 8.5% per annum. Commercial property by contrast is far more yield driven. In many parts of the office and retail markets, the last five years have delivered limited growth, and in some cases outright declines.

Private Credit

Private credit and private markets are another possible destination, but they bring their own trade-offs. Investors give up liquidity, valuations are less transparent, and capital can be tied up for years. While some private assets have produced strong returns, they are not immune to economic cycles, credit stress, or valuation shocks.

There are already enough examples of trouble in parts of the sector. Blue Owl and KKR have both been covered in the press after taking significant markdowns on loans and freezing redemptions. Reuters reported that Blue Owl recently wrote down $1.4 billion, effectively removing about half the value of a significant portion of its assets in one move. That is hardly the sort of experience most investors would want if they are looking for simplicity and transparency.

Equities 

Now equities start to look more interesting.

The share market offers something property does not: liquidity, accessibility, and broad diversification with relatively low transaction costs. Investors can own productive assets without dealing with tenants, repairs, insurance claims, council rates, or strata issues. And under the current budget settings, investors who borrow to buy shares can still offset interest costs against income — a form of negative gearing by another name.

Over the past 30 years, the Australian share market has delivered close to 10% per annum, made up of about 4.5% in fully franked dividends and 5%-5.5% in capital growth. That is slightly stronger than residential property, which makes equities a credible alternative if new policy settings reduce the appeal of housing as an investment asset.

If allocating larger sums directly to shares feels daunting, managed funds provide another route. They allow investors to outsource stock selection and portfolio construction while still participating in the market.

Of course, not every dollar that leaves property will flow into equities. But even a modest shift in capital allocation could have a meaningful effect on share prices.

The scale of the opportunity becomes clearer when the numbers are set side by side. The ABS values the Australian property market at $12.7 trillion, and roughly 27% of that - around $3.5 trillion - is held by investors. By comparison, the Australian share market is worth about $2.2 trillion.

If only 25% of the impacted property capital were redirected toward shares, it would represent nearly a trillion dollars seeking a new home. That would be an enormous increase in demand for equities, potentially in the order of 40% relative to the current market size.

Greater participation would likely improve price discovery and could support higher prices across the market. The strongest beneficiaries would probably be mid-cap and small-cap companies, where incremental capital has a larger effect and pricing can be less efficient.

The broader lesson is simple.

When policy changes disrupt an established investment pattern, the instinctive response is often to focus on the unfairness of the change. But for investors, the more productive response is to ask how capital reallocates and where advantage might emerge.

If even a small portion of property capital migrates into equities, the effect on the market could be substantial. For long-term investors, that is not something to dismiss. It is something to investigate.