CGT, negative gearing changes could worsen housing shortage, modelling warns

The capital gains tax (CGT) discount and negative gearing debate has reignited as we head towards the Federal Budget in May, with the government currently expected to announce some form of change.

A key question is who will benefit from these changes?

Reducing the capital gains tax discount

The Federal Government is reportedly considering reducing the CGT discount.

Will this improve housing affordability? Some reports suggest house prices may only drop by 1 per cent. That’s of little benefit to buyers.

Will it increase supply for buyers? Possibly, in the short term. If changes are applied to existing investment properties, there may be a short-term surge of investors seeking to sell before the discount decreases.

In Western Australia, however, demand is so strong these properties will be snapped up quickly and we will not contribute to a lasting increase to supply. If the change to the discount is only applied to new purchases there is unlikely to be a rush to sell, so there will be no change to supply.

Will it reduce the competition for properties? It may change the nature of demand. Reducing the CGT discount may make property less appealing to investors, reducing their presence in the market. However, with the high level of demand in WA, competition will remain strong regardless.

How will tenants be affected? If investors exit the market, rental supply will decline. This will see vacancy rates tighten and increase the upward pressure on rents. This is the last thing we need in an already constrained market.

Changing the CGT discount is also likely to reduce the appetite for investing in property, exacerbating supply constraints. Over time, this will lead to a long-term deterioration in new supply, making renting more difficult and more expensive than it already is.

Changes to negative gearing

It has been reported the Federal Government is considering removing negative gearing for investors that own three or more investment properties.

According to 2022-23 Australian Tax Office (ATO) data, just over 97,300 (or about 4 per cent) of Australia’s 2,261,000 investors have three or more negatively geared properties. The majority of these (60,700) have three negatively geared properties.

Those investors could sell some of their properties to drop below the three-property threshold and remain eligible to claim negative gearing. This may boost supply for home buyers for a short time, but it would be very unlikely to improve housing affordability significantly.

However, it would remove rental stock from the market, which would put upward pressure on rent prices. Instead of selling, investors may try to increase their rents where possible to reduce their losses. In both cases, affordability decreases for tenants.

It is widely claimed investors compete with first home buyers, using tax policies like negative gearing and the CGT discount to give them an unfair advantage in the market.

Changing negative gearing settings is likely to see investors look to lower-priced suburbs where their investments can be neutrally or positively geared. These are usually the suburbs where first home buyers seek to enter the market. The proposed change could have the unintended consequence of increasing competition between investors and first home buyers.

The broader impact of policy change

It’s not just tenants that will bear the brunt of modifications to the CGT discount and negative gearing. Newly released independent modelling by Qaive and Tulipwood Economics shows changes would affect new housing supply, employment in the construction industry, and the economy.

Commissioned by the Real Estate Institute of Australia, Master Builders Australia, the Housing Industry Association, and the Property Council of Australia, the research modelled several scenarios related to removing or partially removing negative gearing, and removing or lowering the rate of the 50 per cent CGT discount.

All resulted in a reduction in housing starts and a reduction in construction jobs.

Removing negative gearing for all new and current rental properties, except for one current property per investor, would reduce GDP by $3.1 billion in net present value (NPV) terms and reduce dwelling starts by 45,500 over the five-year period 2025-26 to 2029-30.

Construction employment would fall by 4,250 FTEs per year on average. The policy would increase rents above that in the business-as-usual (BAU) scenario by more than 2 per cent per year in real terms by 2029-30.

Allowing negative gearing for only new construction and grandfathering existing arrangements for current property investors, would reduce GDP by $1.6 billion and dwelling starts by 22,750 over the five-year modelling period. Construction employment would fall by 2,000 FTEs per year on average. Rents would rise by almost 1 per cent per year higher than in the BAU scenario.

Halving the CGT discount to 25 per cent would reduce GDP by $822 million in NPV terms and reduce dwelling starts by 12,000 over the five-year period from 2025-26 to 2029-30.

Construction employment would fall by 850 FTEs per year on average. Rents would rise marginally each year in real terms above the BAU scenario.

Halving the CGT discount to 25 per cent and restricting negative gearing to a single existing property would lead to a fall in GDP of more than $3 billion and housing starts of almost 46,000.

When the key aim of the National Housing Accord is to increase supply, the modelling found increasing the tax on housing will lead to less housing. This benefits no one.

Now is the time to focus on policies that boost new housing supply. It is not the time to be making changes to investor-based taxation policies. While potentially having good intentions, the Federal Governments is likely to harm the people they are aiming to help.