One of the key pillars of the recent budget is to make housing more affordable for first‑home buyers and to boost supply. It’s a noble ambition and certainly a socially popular one, if it plays out as intended. But, as Edward Lorenz’s “Butterfly Effect” reminds us, small changes in one part of a complex system can produce large, unintended consequences elsewhere. Housing policy is no exception. We adjust one lever today, and the market may respond in ways no one anticipated tomorrow.

Policy Intent vs. Market Reality

The government’s theory is straightforward: reduce investor appetite for established homes by redirecting them toward new dwellings through favourable tax treatment. Less investor demand should mean lower prices for established homes, improving affordability for first‑home buyers. At the same time, investor activity in new builds should increase supply.

Early evidence shows part of this theory is playing out. Demand for established homes has softened, and prices have begun to fall. That makes the policy appear plausible, at least on the surface.

But the real question is whether this will keep prices low or simply reset the starting point for the next growth cycle.

Investor Psychology: The Missing Variable

After 32 years in real estate, I’ve seen many cycles where investors were absent from the market – even when tax settings were favourable. Their behaviour has always been driven by one dominant belief: the expectation of capital growth.

When the market is rising, investor interest surges. When the market is flat or declining, investor interest evaporates. This pattern challenges the assumption that investors will reliably shift into new homes simply because the tax benefits are attractive. If the market is falling, investors don’t buy, regardless of incentives.

This matters because the budget changes have triggered a decline in property values. In a falling market, investor demand for any type of property is historically weak. That means the expected boost in new‑home supply may not materialise.

The Rental Market: Unintended Consequences Emerging

If investors retreat, rental stock shrinks. Less supply means more competition for available homes, and that inevitably drives rents upward.

We’ve seen this before. When negative gearing was removed in 1985, rents surged over the following two years. The early signs today—tightening rental supply and upward pressure on rents—suggest we may be heading down a similar path.

Short‑term affordability for first‑home buyers may improve as prices fall. But rising rents make it harder to save a deposit, potentially pushing home ownership further out of reach for many.

Once rents rise to the point where investment becomes positively geared, investor demand returns—and so does capital growth.