diff --git a/.babelrc b/.babelrc
index 66701ea4a9d34..007ca4aaa4ce1 100644
--- a/.babelrc
+++ b/.babelrc
@@ -1,6 +1,4 @@
 {
   "presets": ['react', 'es2015', 'stage-0'],
-  "plugins": [
-    'transform-object-rest-spread'
-  ]
+  "plugins": []
 }
diff --git a/README.md b/README.md
index 171dd88f48bfa..209c63adb3054 100644
--- a/README.md
+++ b/README.md
@@ -365,10 +365,28 @@ export.postBuild = function(pages, callback) {
 
 ### Configuring Babel
 
-For **Webpack loaded code** you can't modify Babel's behavior as normal
-by modifying the .babelrc in your site's root directory.
-
-Instead you'll need to modify the Webpack babel loader as [described
+You can modify Babel's behavior as normal by either providing a `.babelrc` in
+your site's root directory or by adding a "babel" section in your site's
+`package.json`. You can find out more about how to configure babel
+[here](https://babeljs.io/docs/usage/babelrc/).
+
+Gatsby by default will use your Babel configuration over the default if it can
+find it. Gatsby will automatically add react-hmre to your Babel config during
+development.
+
+Note that if you want to use babel-plugin that is not provided by Gatsby, you
+will have to also add it to your package.json. You can use any babel-plugin
+that Gatsby packs as a dependency without having to add it to your own
+package.json:
+
+* babel-plugin-add-module-exports
+* babel-plugin-transform-object-assign
+* babel-preset-es2015
+* babel-preset-react
+* babel-preset-stage-0
+
+If you need to change the loader to be something completely custom. You will
+have to define your own webpack loader by following the steps [described
 above](https://github.com/gatsbyjs/gatsby#how-to-use-your-own-webpack-loaders).
 
 ### Deploying to Github Pages (and other hosts where your site's links need prefixes)
diff --git a/lib/utils/babel-config.js b/lib/utils/babel-config.js
new file mode 100644
index 0000000000000..a270e385d064b
--- /dev/null
+++ b/lib/utils/babel-config.js
@@ -0,0 +1,122 @@
+import resolve from 'babel-core/lib/helpers/resolve'
+import fs from 'fs'
+import path from 'path'
+import json5 from 'json5'
+import startsWith from 'lodash/startsWith'
+import invariant from 'invariant'
+
+const DEFAULT_BABEL_CONFIG = {
+  presets: ['react', 'es2015', 'stage-0'],
+  plugins: ['add-module-exports', 'transform-object-assign'],
+}
+
+/**
+ * Uses babel-core helpers to resolve the plugin given it's name. It
+ * resolves plugins in the following order:
+ *
+ * 1. Adding babel-type prefix and checking user's local modules
+ * 2. Adding babel-type prefix and checking Gatsby's modules
+ * 3. Checking users's modules without prefix
+ * 4. Checking Gatsby's modules without prefix
+ *
+ */
+function resolvePlugin (pluginName, directory, type) {
+  const gatsbyPath = path.resolve('..', '..')
+  const plugin = resolve(`babel-${type}-${pluginName}`, directory) ||
+    resolve(`babel-${type}-${pluginName}`, gatsbyPath) ||
+    resolve(pluginName, directory) ||
+    resolve(pluginName, gatsbyPath)
+
+  const name = startsWith(pluginName, 'babel') ? pluginName : `babel-${type}-${pluginName}`
+  const pluginInvariantMessage = `
+  You are trying to use a Babel plugin which Gatsby cannot find. You
+  can install it using "npm install --save ${name}".
+
+  You can use any of the Gatsby provided plugins without installing them:
+    - babel-plugin-add-module-exports
+    - babel-plugin-transform-object-assign
+    - babel-preset-es2015
+    - babel-preset-react
+    - babel-preset-stage-0
+  `
+
+  invariant(plugin !== null, pluginInvariantMessage)
+  return plugin
+}
+
+/**
+ * Normalizes a Babel config object to include only absolute paths.
+ * This way babel-loader will correctly resolve Babel plugins
+ * regardless of where they are located.
+ */
+function normalizeConfig (config, directory) {
+  const normalizedConfig = {
+    presets: [],
+    plugins: [],
+  }
+
+  const presets = config.presets || []
+  presets.forEach(preset => {
+    normalizedConfig.presets.push(resolvePlugin(preset, directory, 'preset'))
+  })
+
+  const plugins = config.plugins || []
+  plugins.forEach(plugin => {
+    normalizedConfig.plugins.push(resolvePlugin(plugin, directory, 'plugin'))
+  })
+
+  return normalizedConfig
+}
+
+/**
+ * Locates a .babelrc in the Gatsby site root directory. Parses it using
+ * json5 (what Babel uses). It throws an error if the users's .babelrc is
+ * not parseable.
+ */
+function findBabelrc (directory) {
+  try {
+    const babelrc = fs.readFileSync(path.join(directory, '.babelrc'), 'utf-8')
+    return json5.parse(babelrc)
+  } catch (error) {
+    if (error.code === 'ENOENT') {
+      return null
+    } else {
+      throw error
+    }
+  }
+}
+
+/**
+ * Reads the user's package.json and returns the "babel" section. It will
+ * return undefined when the "babel" section does not exist.
+ */
+function findBabelPackage (directory) {
+  try {
+    const packageJson = require(path.join(directory, 'package.json'))
+    return packageJson.babel
+  } catch (error) {
+    if (error.code === 'MODULE_NOT_FOUND') {
+      return null
+    } else {
+      throw error
+    }
+  }
+}
+
+/**
+ * Returns a normalized Babel config to use with babel-loader. All of
+ * the paths will be absolute so that Babel behaves as expected.
+ */
+export default function babelConfig (program, stage) {
+  const { directory } = program
+
+  const babelrc = findBabelrc(directory) ||
+    findBabelPackage(directory) ||
+    DEFAULT_BABEL_CONFIG
+
+  if (stage === 'develop') {
+    babelrc.presets.unshift('react-hmre')
+  }
+
+  return normalizeConfig(babelrc, directory)
+}
diff --git a/lib/utils/build.js b/lib/utils/build.js
index 1c00d6955e5b8..e5d3b74d747f1 100644
--- a/lib/utils/build.js
+++ b/lib/utils/build.js
@@ -8,7 +8,6 @@ import buildProductionBundle from './build-javascript'
 import postBuild from './post-build'
 import globPages from './glob-pages'
 
-
 function customPost (program, callback) {
   const directory = program.directory
   let customPostBuild
diff --git a/lib/utils/develop.js b/lib/utils/develop.js
index 3a0f361b75739..8ecefd80e7870 100644
--- a/lib/utils/develop.js
+++ b/lib/utils/develop.js
@@ -33,18 +33,6 @@ module.exports = (program) => {
     }
 
     const htmlCompilerConfig = webpackConfig(program, directory, 'develop', program.port)
-    // Remove react-transform option from Babel as redbox-react doesn't work
-    // on the server.
-    htmlCompilerConfig.removeLoader('js')
-    htmlCompilerConfig.loader('js', {
-      test: /\.jsx?$/, // Accept either .js or .jsx files.
-      exclude: /(node_modules|bower_components)/,
-      loader: 'babel',
-      query: {
-        presets: ['react', 'es2015', 'stage-1'],
-        plugins: ['add-module-exports'],
-      },
-    })
 
     webpackRequire(htmlCompilerConfig.resolve(), require.resolve(HTMLPath), (error, factory) => {
       if (error) {
diff --git a/lib/utils/webpack.config.js b/lib/utils/webpack.config.js
index 46909881bf126..ac1cebad768a7 100644
--- a/lib/utils/webpack.config.js
+++ b/lib/utils/webpack.config.js
@@ -6,6 +6,8 @@ const debug = require('debug')('gatsby:webpack-config')
 import path from 'path'
 import _ from 'lodash'
 
+import babelConfig from './babel-config'
+
 let modifyWebpackConfig
 try {
   const gatsbyNodeConfig = path.resolve(process.cwd(), './gatsby-node')
@@ -185,9 +187,7 @@ module.exports = (program, directory, stage, webpackPort = 1500, routes = []) =>
       test: /\.jsx?$/, // Accept either .js or .jsx files.
       exclude: /(node_modules|bower_components)/,
       loader: 'babel',
-      query: {
-        plugins: ['add-module-exports'],
-      },
+      query: babelConfig(program, stage),
     })
     config.loader('coffee', {
       test: /\.coffee$/,
@@ -285,16 +285,6 @@ module.exports = (program, directory, stage, webpackPort = 1500, routes = []) =>
             require('postcss-reporter'),
           ],
         })
-        config.removeLoader('js')
-        config.loader('js', {
-          test: /\.jsx?$/, // Accept either .js or .jsx files.
-          exclude: /(node_modules|bower_components)/,
-          loader: 'babel',
-          query: {
-            presets: ['react-hmre', 'react', 'es2015', 'stage-1'],
-            plugins: ['add-module-exports'],
-          },
-        })
         return config
 
       case 'build-css':
diff --git a/package.json b/package.json
index 5a42d926df573..e0ec9420d3f89 100644
--- a/package.json
+++ b/package.json
@@ -14,7 +14,7 @@
     "babel-core": "^6.8.0",
     "babel-loader": "^6.2.4",
     "babel-plugin-add-module-exports": "^0.2.0",
-    "babel-plugin-transform-object-rest-spread": "^6.8.0",
+    "babel-plugin-transform-object-assign": "^6.8.0",
     "babel-preset-es2015": "^6.6.0",
     "babel-preset-react": "^6.5.0",
     "babel-preset-react-hmre": "^1.1.1",
@@ -40,6 +40,7 @@
     "invariant": "^2.2.1",
     "json-loader": "^0.5.2",
     "less": "^2.7.1",
+    "json5": "^0.5.0",
     "less-loader": "^2.2.0",
     "loader-utils": "^0.2.14",
     "lodash": "^4.12.0",
diff --git a/test/fixtures/site-with-babelpackage/package.json b/test/fixtures/site-with-babelpackage/package.json
new file mode 100644
index 0000000000000..43e652bd03659
--- /dev/null
+++ b/test/fixtures/site-with-babelpackage/package.json
@@ -0,0 +1,5 @@
+{
+  "babel": {
+    "presets": ["react", "es2015", "stage-0"]
+  }
+}
diff --git a/test/fixtures/site-with-invalid-babelrc/.babelrc b/test/fixtures/site-with-invalid-babelrc/.babelrc
new file mode 100644
index 0000000000000..93528edbe3fe7
--- /dev/null
+++ b/test/fixtures/site-with-invalid-babelrc/.babelrc
@@ -0,0 +1,2 @@
+{
+  presets: ['react']
diff --git a/test/fixtures/site-with-unresolvable-babelrc/.babelrc b/test/fixtures/site-with-unresolvable-babelrc/.babelrc
new file mode 100644
index 0000000000000..fb83380910a28
--- /dev/null
+++ b/test/fixtures/site-with-unresolvable-babelrc/.babelrc
@@ -0,0 +1,8 @@
+{
+  plugins: [
+    "transform-decorators-legacy",
+    "transform-async-to-generator",
+    "transform-es2015-modules-commonjs",
+    "transform-export-extensions",
+  ]
+}
diff --git a/test/fixtures/site-with-valid-babelrc/.babelrc b/test/fixtures/site-with-valid-babelrc/.babelrc
new file mode 100644
index 0000000000000..ed1dfd7029d02
--- /dev/null
+++ b/test/fixtures/site-with-valid-babelrc/.babelrc
@@ -0,0 +1,3 @@
+{
+  "presets": ['react', 'es2015', 'stage-0']
+}
diff --git a/test/utils/babel-config.js b/test/utils/babel-config.js
new file mode 100644
index 0000000000000..72ae0bd5b63e8
--- /dev/null
+++ b/test/utils/babel-config.js
@@ -0,0 +1,60 @@
+import test from 'ava'
+import path from 'path'
+import includes from 'lodash/includes'
+import babelConfig from '../../lib/utils/babel-config'
+
+function programStub (fixture) {
+  const directory = path.resolve('..', 'fixtures', fixture)
+  return { directory }
+}
+
+test('it returns a default babel config for babel-loader query', t => {
+  const program = programStub('site-without-babelrc')
+  const config = babelConfig(program)
+
+  t.true(typeof config === 'object')
+  t.truthy(config.presets.length)
+  t.truthy(config.plugins.length)
+})
+
+test('all plugins are absolute paths to avoid babel lookups', t => {
+  const program = programStub('site-without-babelrc')
+  const config = babelConfig(program)
+
+  config.presets.forEach(preset => t.true(path.resolve(preset) === preset))
+  config.plugins.forEach(plugin => t.true(path.resolve(plugin) === plugin))
+})
+
+test('fixture can resolve plugins in gatsby directory (crawling up)', t => {
+  const program = programStub('site-with-valid-babelrc')
+
+  const config = babelConfig(program)
+  t.truthy(config.presets.length)
+})
+
+test('throws error when babelrc is not parseable', t => {
+  const program = programStub('site-with-invalid-babelrc')
+
+  t.throws(() => babelConfig(program))
+})
+
+test('can read babel from packagejson', t => {
+  const program = programStub('site-with-valid-babelpackage')
+
+  const config = babelConfig(program)
+  t.truthy(config.presets.length)
+})
+
+test('when in development has hmre', t => {
+  const program = programStub('site-without-babelrc')
+  const config = babelConfig(program, 'develop')
+
+  // regex matches: babel followed by any amount of hyphen or word characters
+  const presetNames = config.presets.map(p => p.match(/babel[-|\w]+/)[0])
+  t.true(includes(presetNames, 'babel-preset-react-hmre'))
+})
+
+test('throws when a plugin is not available', t => {
+  const program = programStub('site-with-unresolvable-babelrc')
+  t.throws(() => babelConfig(program))
+})