Federal budget changes to negative gearing, designed to steer investors toward new construction, may be creating a second-order problem for Melbourne's rental market, with one senior property adviser warning that rents in the city's tightest suburbs could climb by as much as 20% over the next two to three years.
Andrew Date (pictured), founder and senior property adviser at Industry Insider Property Toorak, said the shift in investor behaviour has been immediate. Clients who were previously targeting established homes have pivoted sharply toward new builds since the budget was handed down, driven by the desire to retain access to negative gearing and the 50% capital gains tax discount.
Date acknowledged that the policy appears to be working as intended, but warned the redirection is colliding with a construction sector that cannot absorb it.
"Demand for new builds is rising at the same time as new housing supply in Melbourne remains well below what the market requires. There are not enough cranes in the air to keep up with the number of people coming into our state," he said.
Victoria's construction pipeline is struggling to keep pace. According to the Australian Bureau of Statistics, dwelling commencements fell to 13,489 in the December quarter — down 39% from a peak of 22,155 in early 2021. The state's Housing Statement targets around 20,000 completions per quarter, but both commencements and completions are running at roughly two-thirds of that pace. High construction costs, labour shortages, and financing pressures continue to constrain delivery.
The shift is most pronounced among investors in the $600,000 to $1.5 million price range, particularly higher-income earners seeking to offset significant tax liabilities. Overall inquiry has slowed since the budget, adding a demand-side chill to a supply-constrained market.
Compounding the new build bottleneck is an exodus of long-term landlords from the established market. Date said rising land tax, compliance burdens, and the cumulative weight of ongoing ownership costs are prompting investors who have held properties for a decade or more to sell and reallocate capital into more passive asset classes such as superannuation.
"Investors are being pushed towards a relatively limited pool of new stock, while at the same time, we're seeing some long-term investors sell established properties because of rising holding costs, land tax and compliance requirements," he said.
When those properties are absorbed by owner-occupiers rather than other investors, rental stock is permanently removed from the market. Date said this dynamic is the central driver behind his rent forecast.
The scale of that removal is already measurable. New analysis by FoundIt found 5,565 former Melbourne rentals sold in a recent quarter, with 21% of all homes listed for sale in both Sydney and Melbourne having been agency-managed rentals — a volume the report described as a "flood."
Date said the cumulative effect is already reflected in his outlook.
"That's why I believe rents in some markets could rise by around 20% over the next two to three years," he said.
Date expects the steepest increases in locations combining strong demand with limited supply — suburbs with sought-after school zones, established infrastructure, and a constrained pipeline of new dwellings. Premium townhouses, family homes, and high-quality apartments in tightly held locations are the most exposed.
The trend is already visible in the data. According to SQM Research, Melbourne asking rents rose 0.7% between late April and late May 2026 — more than double the national average of 0.3% over the same period.
For brokers, the pressure extends further. CBA, ANZ, NAB, Macquarie, Great Southern Bank, and Suncorp have all tightened investor lending policies post-budget, restricting negative gearing add-backs in serviceability calculations for established properties — potentially squeezing investor borrowing capacity as rental stock shrinks.
"The government is clearly trying to encourage investment into new housing," Date said. "The question is whether enough can be built quickly enough to prevent further pressure on rents in the meantime."
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