Australia’s auction clearance rates have crashed to the lowest level since the start of the pandemic six years ago in a clear sign Labor’s Budget could potentially turn off property investors for years to come and hurt renters.

In the final weekend of autumn, the combined capital city auction clearance rate dived to 54.5 per cent, which was the worst result since the final week of April 2020 during the early stages of COVID, preliminary Cotality data showed.

Labor’s Budget plan to restrict negative gearing to brand new properties from July 2027 and replace the 50 per cent capital gains tax discount with a minimum 30 per cent tax on inflation-adjusted gains could discourage landlords and potentially reduce the supply of rental properties for the next two to five years, Cotality’s head of research Tim Lawless told The Nightly.

“This, in many ways, might be the policy change that sees investors becoming much less active across housing as an investment class,” he said.

“For investors in housing, capital gains have typically been the main game, so if your opportunities to maximise your capital gain are reduced, again you’ll probably find that’s a disincentive for investment demand.”

Sydney’s auction clearance rate of 51.9 per cent for the last weekend of May was also at a six-year low in a market where four in 10 buyers during the March quarter were investors before the Budget.

“Sydney, obviously, a lot more unaffordable so I think buyers are probably a lot more sensitive to the cost of debt,” Mr Lawless said.

“It’s a market that has one of the largest exposures to investors.”

Sydney’s median house price dived by 1.1 per cent in May to a still unaffordable $1.579 million while Melbourne’s equivalent value fell by 1 per cent to $958,361 despite it now being cheaper than Brisbane, Perth or Adelaide with smaller populations.

Melbourne’s auction clearance rate of 58.1 per cent was the worst since April 2023 during the Reserve Bank of Australia’s last interest rate hiking cycle.

“Interest rates moving up, the Melbourne market seems a lot more fragile than most other markets,” Mr Lawless said.

Capital gains have traditionally been stronger for established houses with scope for improvements that could add value.

Brand new houses are usually more expensive while newly-built apartments had quality issues during the 2010s, as a result of problems with private certifiers in New South Wales in particular.

Mr Lawless said investors in these circumstances may turn to other assets like shares, despite them having the same capital gains tax treatment under Labor’s Budget policies, because they don’t incur charges like strata fees and council rates as properties do.

“They’ll probably just look at other asset classes — the reality is housing is a very low-yielding asset class so if you can’t offset your losses against your taxable income, I think we’ll see a flight to high-yielding assets,” he said.

Treasurer Jim Chalmers blamed the Reserve Bank’s three interest rate rises this year for the tumbling auction clearance rates.

“When it comes to auction clearance rates, there are a number of factors playing out there, including the last few decisions by the independent Reserve Bank, the broader economic conditions and also the policy changes in the Budget, some of those as you cited in your question . . . some of those clearance rates were coming down already,” he told reporters in Brisbane on Monday.

“The Budget is not the only factor when people are thinking about those participating in some of those auctions.

“But if we are making it easier for first-home buyers to get a fair crack at auctions, that’s a good thing.”

Ray White chief economist Nerida Conisbee said Labor’s plan to revive the system of indexation on capital gains that existed from 1985 to 1999 could also hurt the Federal Government’s tax revenue if property values fell.

“If property values grow slowly, or fall, while inflation remains high, indexation can significantly reduce the taxable gain,” she said.

“That means over the next few years, if inflation remains elevated and price growth weakens, the new system could raise less tax from some property investors selling than the old 50 per cent discount would have.

“The outlook is now likely to become weaker. The Budget’s housing tax changes are designed to reduce investor demand for established property, which will weigh on prices.”

Labor is expecting changes to negative gearing and capital gains taxes to increase tax receipts by $3.6 billion over the five years from 2025–26.

The policies don’t come into effect until July 1, 2027 but those who exchanged and settled on an investment property after Budget night will only have access to negative gearing for the 2026-27 financial year where they could claim rental losses against their taxable income.

Unlike the pandemic, inflation is high which means the Reserve Bank is much more likely to raise rates rather than cut them, which would further reduce borrowing capacity and housing demand.

Property values in May still rose in Brisbane, Perth and Adelaide which are still strong housing markets that don’t traditionally have auctions.