May 2026 column
The past month has seen a jump in inflation on the back of the war in the Middle East, another increase in interest rates and fundamental changes to negative gearing and the capital gains tax discount announced in the federal budget.
Let’s look at the data.
Federal budget delivers a shock to investors
The federal government in their budget for 2026-27 announced some major changes for investment in Australia. Some of these were specific to property whilst others applied to all asset classes.
Negative gearing for residential property will be limited to new builds only from July 2027. Those properties that were held at 7.30pm AEST on budget night will be exempt from these changes (changes are grandfathered).
Investors who purchase investment properties now will have the choice to either buy a new property to access negative gearing or if they buy an existing property, they can only offset any rental losses against rental income, losses can be carried forward.
From 1 July 2027, the capital gains tax discount will change from a 50% discount to a cost-based indexation with a floor rate of 30%. In the current regime, the highest effective rate of capital gains tax someone would pay is 23.5%, under the new system the minimum effective rate they would pay is 30%.
People with current investments will not be spared from recent changes, with indexation also affecting them from 1 July 2027 onwards. It should also be noted that this change is not just for property but other asset classes too, it is a tax increase on investment.
Interestingly, people who invest in new properties will have the option when they sell to either choose the 50% discount to CGT (the current system) or cost-based indexation with a floor rate of 30%. They can choose whichever is better for them.
These two changes are likely to make investing in property less attractive, particularly investment in existing properties. While the intent is to drive more investment to new properties, I believe that the major impact will be lower overall investment.
When you have a growing population, you need to be growing investment, which is rental stock, and I believe a major by-product of these changes will be more competition for rentals which means lower vacancy rates (they are already low) and higher rents.
Inflationary pressures remain elevated
The latest read on inflation showed that both headline and underlying inflation remain above target, and the RBA is forecasting it will remain above target for some time.
Over the year to March 2026, headline inflation was 4.6 per cent with the RBA’s preferred measure of underlying inflation lower but still elevated at 3.3 per cent. Both remain above the target range and while that is the case, risk remains tilted towards higher interest rates.
In Melbourne specifically, inflation was 4.6 per cent over the past year which was in line with national inflation.
For those who own a home or are looking to own a home, higher inflation for longer is likely to see interest rates higher for longer too. In turn this means reduced borrowing capacities, potentially more people looking to sell and lower overall demand for housing.
Interest rates rise for the third time in three meetings
After 25 basis point increases to the cash rate in the February and March meetings, the May RBA Monetary Policy Board meeting saw another 25 basis point increase to the cash rate.
This third increase in rates this year took the cash rate to 4.35 per cent, reversing out the three rate cuts last year and seeing the cash rate return to highs last seen in late 2011.
The cash rate futures market is currently pricing another 25 basis point increase to the cash rate this year and no rate reductions for the next 18 months. We’re clearly looking at a situation right now where it looks like interest rates will be at a higher level for longer.
I think there will be a reprieve from interest rate increases at the next RBA Monetary Policy Board meeting but the longer inflationary pressures persist and the longer the war rolls on in the Middle East the likelier it is that interest rates increase.
I continue to believe that households with a pre-approval now have a level of urgency to purchase which could see sales volume hold up for a while.
Thereafter, borrowing capacities will be reduced and I expect there will be fewer active buyers in the market. Selling may become more difficult and we may see some moderate declines in housing prices in Victoria.
Dwelling price growth slows to a crawl
The April 2026 data from the REIV shows that Melbourne’s median house price was $962,000 and the median unit price was $650,000. Median house prices were 0.2 per cent higher over the month and 5.1 per cent higher over the year while median unit prices rose 0.6 per cent over the month and by 4.0 per cent over the year.
Although the data shows median prices in Melbourne are still rising, the rate of growth remains much slower than most other capital cities. Similarly, Melbourne housing price growth has underperformed the rest of the country for several years seeing the city become much more affordable compared to most other capital cities.
Regional Victoria recorded a median house price of $650,000 in April 2026 while the median unit price was $450,000. Regional house prices increased by 0.8 per cent for the month and 8.3 per cent over the year while regional unit prices were 0.3 per cent higher over the month and 7.3 per cent higher than a year ago.
Regional Victoria prices remain much lower than those in Melbourne and it continues to see a much stronger rate of price growth.
While lower prices may be an attractive prospect for buyers, stock levels across Victoria remain elevated, particularly in Melbourne, and this is limiting capital growth right now.
Rental growth was mixed over the month but higher over the year
In April 2026, the median house and unit rent in Melbourne was $590 per week. House rents were 1.7 per cent higher over the month and 2.6 per cent higher over the year. Unit rents were 1.7 per cent lower over the month but were 5.4 per cent higher over the year.
Houses have seen only moderate rental growth over the year, well below inflation, while unit rents have seen stronger growth. Rents in Melbourne relative to the other major capital cities, remain quite low and this may start to attract more younger people to the city with the lure of job opportunities and cheaper housing costs.
In regional Victoria, house rents are $520 per week and were unchanged over the month and 5.1 per cent higher over the year. Unit rents in regional Victoria sit at $420 per week, unchanged over the month and 5.0 per cent higher over the past year.
The rental vacancy rate increased by a percentage point over the month and year to 2.6 per cent while in regional Victoria the rental vacancy rate is 2.3 per cent unchanged over the month and up from 2.1 per cent a year earlier.
Renters across Victoria continue to have relatively more choice than they do in most states and they pay lower weekly rents. It will be interesting to monitor the rental market over the coming months, as higher interest rates potentially reduce demand to purchase we may see rental vacancy rates tighten, especially with a lower supply of new rental housing stock.
The supply of housing stock for sale in Melbourne remains at historically elevated levels
Data from SQM Research found that in April 2026 there were 17,364 new property listings in Melbourne. New listing volumes were 12.9 per cent lower over the month but 14.9 per cent higher than they were a year ago.
The annual rise in new listings in Melbourne is much greater than the 14.9 per cent increase nationally.
There were 42,389 total property listings in Melbourne in April 2026 which is historically elevated and the largest volume of any capital city in the country. Total listings were 0.4 per cent higher over the month and 10.0 per cent higher than a year ago.
The 10 per cent increase from an already high volume of listings compares to historically low total listing volumes nationally that were 3.3 per cent lower than a year ago.
The ongoing heightened volume of stock for sale and an ongoing large volume of new listings hitting the market is a major contributor to the much weaker price growth in Melbourne relative to the other capital cities.
Sales are still occurring but there’s no doubt that buyers are cautious and more discerning.
In this environment the presentation of the property and setting a realistic price is imperative. Even with these things right it still may be a challenge to draw offers out of purchasers.
Final thoughts
The Victorian housing market continues to track at a more moderate pace compared to the other states and territories.
While properties are transacting, stock levels are high and capital growth is low despite the fact that both purchase and rental affordability is relatively attractive.
It seems more so than anything else there is apprehension and cautiousness from buyers and a lack of confidence in the market.
In these conditions first impressions are imperative both in terms of how you present your property in advertising, including pricing, and how the property presents at an inspection.
These proposed changes to negative gearing and capital gains tax discount seek to drive investors to new housing and generally discourage investment. In Victoria we’ve already seen what happens when you make investment less attractive, investors sell and the stock of property available for sale rises.
I think these changes potentially lead to some softer conditions in the Victorian housing market. In saying that, I would say that these changes are also likely to drive investors to be much more focused on rental returns than capital growth and some areas of Victoria are offering very attractive yields.
About Cameron Kusher
Over the last 20 years Cameron has worked as a property researcher for major businesses such as PRDnationwide, CoreLogic (now Cotality) and REA Group.
Cameron spent 12 years at CoreLogic as the Head of Research for Australia and 5.5 years at REA Group as the Director of Economic Research. Over the past 17 years he has become a well-regarded thought-leader on the residential property market and delivered thousands of presentations to the industry, customers and consumers.
He is passionate about taking complex economic and property insights and making them easy for anyone to understand, free of the jargon that most economic and property presentations tend to contain.