The City’s gaze has drifted south, to the sunburnt markets of Australia, where a simmering political debate over property tax breaks has sent a shiver through the country’s most expensive postcodes. For those of us who have spent decades watching the ebb and flow of capital from Mayfair to Manhattan, the developments in Sydney and Melbourne are more than a colonial curiosity. They are a dress rehearsal for a fiscal drama that could easily play out on these shores, with gilt yields and the cost of government borrowing hanging in the balance.

The policy at the centre of the storm is the capital gains tax (CGT) discount on property, a long-cherished concession that allows homeowners to pay only half the tax on gains from the sale of investment properties held for more than 12 months. This concession has been a pillar of Australia’s housing investment boom, fuelling a surge in the number of buy-to-let landlords and pushing the nation’s household debt-to-income ratio to a mind-bending 212% (the second highest in the OECD after Switzerland). Now, with a federal election looming, the opposition Labour Party is threatening to scrap the discount for new purchases, a move that the property lobby claims could trigger a 25% drop in high-end prices.

Let us be clear: this is not about helping first-time buyers afford a flat in Parramatta. This is about the effect on the very top end of the market. When you strip away tax privileges from property, you reduce its appeal relative to equities and bonds. Capital flight is a very real phenomenon. We have seen it in the UK during the 2016 stamp duty surcharge on second homes, and we saw it again when the government tinkered with the non-domicile regime. Money flows to wherever the returns are highest after tax, and if Australia reduces the after-tax returns on property, that money will look for another home.

For the UK, the implications are twofold. First, there is a direct correlation: Australian capital, both from domestic investors and from overseas Chinese buyers who have previously favoured Sydney and Melbourne, could rotate into London prime property. The pound’s recent weakness against the Australian dollar (down 12% in the past 12 months) makes London look cheap. But secondly, and more worryingly, this policy debate is a harbinger of a global shift. The UK has its own capital gains tax break: the principal private residence relief. While that remains sacrosanct for primary homes, the UK government is already eyeing the £60bn lost annually to various property reliefs. If the next Chancellor decides to follow Australia’s lead and restrict relief on second homes or investment properties, the market for buy-to-let and high-end London flats will feel the chill.

Market volatility is the only certainty. The Australian property index has already weakened in anticipation of the election. The ASX 200 real estate sector has underperformed the broader market by eight percentage points since the policy debate intensified in January. This is the kind of sector rotation that investors should watch: the signal that property is becoming less of a sure thing.

Let us now consider the macro backdrop. Australia’s central bank has been remarkably passive, keeping rates at 4.35% while inflation persists at 3.4%. That is a negative real yield, an environment that should support risky assets, but the uncertainty over tax policy is overriding the monetary stimulus. In the UK, the Bank of England’s rate path is similarly unclear, and the worst thing the government could do is add to the uncertainty with a retroactive or ill-conceived tax change. The Australian debate is a cautionary tale: the opposition’s proposal is phased in only for new purchases, but the market is already discounting future lower prices for existing homes. That is how markets work: they price in expectations.

For the UK property market, the message is simple. Do not assume that the current high prices are immune to policy changes. The price of a home, like the yield on a gilt, is determined by the present value of its future cash flows and tax advantages. If you take away the tax advantage, the price falls. It is a cliché, but it is also the truth: everything comes down to supply and demand. And if the demand from investors is reduced by a tax change, the market will re-base.

In conclusion, watch Australia. Watch the election. Watch the flow of capital. And if you own prime London property, perhaps now is a good time to check your portfolio’s exposure to policy risk. The bottom line is never as solid as it seems.