Scrapping CGT and negative gearing tax breaks for property investors will likely see rents rise but far from the 30 per cent figure claimed by some in the industry, an economist says.
Negative gearing and capital gains tax reforms will both be included in the May budget with a clear focus on encouraging investors to build new homes, news.com.au reported on Tuesday, with both measures firmly on the table as the Albanese government finalises the May 12 budget this week.
While the details are yet to be announced, the government wants to preserve incentives for investors to put their money into new buildings to improve supply.
With speculation mounting in recent months that the tax breaks were on the chopping block, fierce debate has raged over whether the move will finally ease housing affordability or send rents skyrocketing and constrain rental supply.
A number of those opposed to the reforms have predicted a repeat of the mid-1980s, when rents rose as much as 30 per cent over two years in some cities after the CGT was introduced and the Hawke government temporarily abolished negative gearing.
“More recent estimates … certainly don’t align with some of the narrative around rents being supercharged,” Curtin University Economics Professor Rachel ViforJ told news.com.au.
“There are studies that have pointed back to what happened in the ‘80s but there are also studies that suggest that’s not reflective of what might happen nationally. The more recent studies say under current conditions the increase [won’t be as severe].”
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Prof ViforJ highlighted research that estimated scaling back negative gearing would reduce rental supply, leading to rent increases ranging from 0.55 per cent, to 2.5–4.1 per cent.
“If you were to wind back negative gearing and CGT at the same time I would expect the increase to be higher,” she added.
Negative gearing allows investors to deduct rental losses against other income. The 50 per cent CGT discount, introduced by the Howard government in 1999, is available to investors who sell a property after owning it for at least 12 months.
When used together, the concessions incentivise holding onto loss-making properties with the promise of a profit when the investment is sold at a later date, as home prices inexorably rise.
“Until the CGT regime negative gearing had only been about deferring tax, but with the CGT change it became about deferring and reducing tax,” independent economist Saul Eslake said earlier this month.
Prof ViforJ said an important factor was public sentiment had towards negative gearing reform had shifted in recent decades as rising house prices increasingly locked young people out of the market.
“That shift in sentiment is quite important because it translates into behaviour,” she said. “I would suggest investor sentiment and investor behaviour are slightly less averse now towards negative gearing reform.”
One study estimated that the combination of winding back both concessions would boost the home ownership rate by 4.7 per cent as investors hold onto property for shorter periods.
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Prof ViforJ said that meant any budget reforms should be focused on easing concerns about a reduction in rental supply — such as allowing negative gearing for new housing, not making any changes retrospective and ensuring transitional arrangements.
“Of course we also have concerns around infrastructure bottlenecks, but that’s an issue that affects new supply anyway with this reform or not, so [there should be] policy decisions that directly address construction,” she said.
Negative gearing and CGT have widely been seen as distorting the housing market.
Prime Minister Anthony Albanese gave a major hint earlier this month that he would reform the property concessions, describing his budget as focused on what he calls “intergenerational equity”.
“For a Labor Government economic reform is never an end in itself, it is only the means to an end,’’ Mr Albanese told the National Press Club.
“A home of your own. The intergenerational equity at the heart of the oldest and most Australian aspiration of them all, passing on greater opportunity to your children.
“That is how we bring people with us. It is also where we want to go.”
In another pointed message, Mr Albanese said that “we will not generate the same prosperity or create the same opportunities, if we continue to rely on an economic model designed in a different time and built for a more predictable world”.
“Australia will not find our future security in the past,’’ he said.
ACTU secretary Sally McManus has urged the Prime Minister to just “bite the bullet”.
“Otherwise, we’re just saying ‘too bad young people, you’re not going to be able to ever own a home, forget about even thinking about it,’’ she said.
“Since 2019, the problem has just got worse. It’s going to continue to get worse unless the government is brave enough to do something about it. We are just abandoning those generations and we think that is fundamentally wrong.”
Support for the reining in the tax breaks unsurprisingly falls along partisan lines, but overall more Aussies favour winding back the concessions than not.
Polling conducted for The Australia Institute last month found 50 per cent approve versus 28 per cent disapprove, while just 15 per cent favoured providing tax breaks to encourage property investors to supply rentals compared with 50 per cent support for building more public and community housing.
A Greens-led Senate inquiry into the CGT last month found the discount was skewing home ownership towards investors, disproportionately benefiting wealthier Australians and distorting productive investment.
Around half of rental investors, or 1.1 million, in Australia are negatively geared, with 71 per cent of rental deductions claimed by the top 30 per cent of income earners.
— with Samantha Maiden
