Even if there is an immediate deal and the Strait reopens – free of naval mines – tomorrow, the next Persian Gulf shipment will still take another two months to arrive on our shores. Meanwhile, the supply disruption is real, and higher input costs are here today, working through every part of our domestic supply chain.

Given this supply chain disruption, there are clear signs of broad-based cost escalation for the construction sector ahead. Fuel prices have risen the most, partly offset by a temporary cut in fuel taxes. Other items – plastics, metals & chemicals – are also posting big price rises. All this adds to the input cost base in 2026.

Oil price spikes are not new in history, and they follow a very well-trodden path. Indeed, oil prices and construction costs are tightly correlated, and likely to drive another round of inflation later this year. That said, given the oil price gains so far, we are looking at a milder shock in 2026, compared to 2022.

For now, local builders are facing tighter profit margins from higher interest rates and higher costs. That said, builders are better positioned to manage this in 2026, following their experiences from the pandemic. Indeed, builders have moved away from bearing the full risks for cost escalations in fixed-price contracts.

For investors, higher inflation and interest rates are adding layers of uncertainty and complexity to the outlook. Higher material costs and tighter builder margins will require more diligent surveillance of builder cash flows. Meanwhile, higher interest rates will weigh on equity returns, while boosting floating-rate credit returns.

The 50% capital gains tax discount will be replaced with an indexed cost base. A 30% minimum rate will apply for most taxpayers. Negative gearing – or tax loss deductions – will be restricted to new residential properties in the future. Importantly, negative gearing is preserved for existing landlords.

The new reforms make a bigger distinction between newly-built and older, second-hand housing stock. Negative gearing benefits still apply in full for new housing stock. There is clear policy intent here to incentivise new residential construction, in a bid to address the persistent undersupply in the housing market today.

These tax reforms are coming at a time of rising mortgage rates, which are driving modest pricing downturns in Sydney and Melbourne. The downward impact on prices will be more apparent for established housing and less so for new home construction, as investors reallocate to more tax efficient strategies.

These proposals are deeply unpopular with some investors, especially following promises of no policy change made last election. Moreover, these reforms will have disproportionate impacts on wealthier investors, particularly the top 1% of taxpayers, who have been outsized beneficiaries of these tax breaks in the past.

With these proposed tax reforms, there are big implications for investor strategy. Over time, we would expect a clear reallocation of investor capital from established to new housing, from individual holdings to managed funds and a shift in strategic focus from capital gains to income returns.

Across Australia and New Zealand, we have seen wide, enduring gaps in performance persisting across multiple seasons, especially off the sporting field, across both regional economies and residential and commercial real estate returns.

For Perth and Brisbane, robust population gains and a strong outlook for mining / infrastructure / Olympics investments will hold these markets near the top of the table. The challenge here is accessing the local opportunities and competing for building capacity.

For Sydney, its middling market performance is being constrained by housing affordability, although new infrastructure works and a slightly more permissive planning environment should support a stronger pace of development supply over coming years.

For Melbourne and Auckland, which have struggled with localised pricing downturns in recent years, we are seeing more positive signs of residential market activity in 2026, given improving population growth profiles and a partial reset in housing affordability.

Given these persistent performance gaps, there is plentiful scope for alpha returns, just by picking the right locations and market segments. Having a well-established local team is an important prerequisite for successfully sourcing deals and deploying capital.

For portfolio investors, it is important to set sufficiently wide geographical limits, to take advantage of the best scoring opportunities across different regions, which are often sitting outside of the largest markets of Sydney and Melbourne.

A series of high-profile business failures in the US and the UK – amid allegations of fraudulent conduct – are raising legitimate investor questions about private credit strategies. As a result, some investors are being more cautious with capital inflows.

The key investor concern relates to the broader credit market. Are there other yet-to-be-reported business failures in the wings? Are there more instances of fraud? Will the AI boom fizzle out, removing a key source of US borrower demand?

From our perspective, this is a necessary shakeout for the industry, removing lenders that have aggressively deployed at diminished margins and higher risks. Out of this, we will see a renewed industry focus on pricing risk and underwriting quality.

Importantly, there are many types of private credit. Australia focuses more on real-asset-backed finance, with shorter loan terms, less use of back leverage and real estate collateral that generate real income and have a tangible resale value.

Key aspects of the Australian economy are tracking differently compared to Europe and the US. There is stronger population growth underpinning demand in Australia. Local interest rates are rising more quickly, to the benefit of floating rate lenders.

After a golden age, we are seeing an age of reason and discernment for private credit. Australian credit segments are still delivering for investors, with consistent and diversified asset-backed incomes. Investors need to be more selective and discerning ahead.