The Australian property market, long a darling of British expatriates and offshore investors, is showing signs of cracking under the weight of its own success. With home prices in Sydney and Melbourne rising at double-digit rates, the government in Canberra is now contemplating a move that would send shivers down the spine of any buy-to-let landlord: the abolition of negative gearing and capital gains tax discounts. For British investors who have piled into Australian real estate as a hedge against Brexit uncertainty and a weak pound, this is a moment to watch with alarm.

The logic from Canberra is clear. Negative gearing, which allows property investors to deduct losses from their taxable income, has long been blamed for inflating house prices and locking out first-time buyers. The tax break, combined with a 50% discount on capital gains tax for assets held more than 12 months, has created a powerful incentive for speculative buying. According to the Australian Treasury, these concessions cost the budget over $10 billion annually. With home ownership rates falling and household debt at record levels, the government is under pressure to act. But for markets, the question is whether such a move would be a prudent correction or a reckless intervention.

Let us be clear: the Australian property market is not a bubble in the classic sense. It is a structural phenomenon driven by constrained supply, strong population growth and a chronic shortage of affordable housing. However, the tax system has poured petrol on the fire. If the government removes the tax advantages, the impact on investor demand could be significant. Australian banks, already cautious after the Hayne royal commission, would likely tighten lending further. The result could be a sharp slowdown in price growth, or even a correction.

What does this mean for British investors? For those who have already committed capital, the immediate risk is a potential fall in property values. The capital gains tax discount, which currently allows investors to halve their tax bill on profits, is a key factor in the returns equation. Remove that, and the yield profile looks very different. For those considering entering the market, the window of opportunity is closing. The Australian dollar, already under pressure from commodity price fluctuations, could weaken further if foreign capital flows diminish.

There is a broader lesson here for the British market. The UK's own stamp duty surcharge and the gradual tightening of buy-to-let mortgage interest relief have already chilled the domestic buy-to-let sector. Australian policymakers are watching the UK experiment closely. If they proceed, they will likely face a similar backlash from property investors and a potential slowdown in construction. But the political calculus is different. In Australia, housing affordability is a defining issue, and the government may be willing to sacrifice some investor sentiment for political gain.

From the perspective of a City veteran, the Australian move is a reminder that no tax break is permanent. Markets should never rely on fiscal generosity to sustain valuations. The best investments are those that stand on their own feet, without the crutch of subsidies. For British investors, this is a moment to reassess exposure to Australian property. If the tax breaks go, the fundamentals of supply and demand will still hold, but the margin for error narrows. Gilt yields in the UK remain historically low, and the search for yield has driven capital into property markets across the globe. That search is becoming riskier.

In the short term, expect increased volatility in Australian real estate investment trusts and property-related stocks. The Australian dollar may also see some selling pressure as foreign investors repatriate capital. But the long-term impact will depend on how the government balances the need for fiscal responsibility with the risk of a housing downturn. For now, British investors should watch this space with the same scepticism they apply to any government intervention. The bottom line is simple: if the tax breaks go, the property market will adjust. The question is how painful that adjustment will be.