Crippling housing debate paralysis ignoring the real issue

We all know what it’s like to get trapped in a thought loop – worrying over and over about something without actually tackling the root cause.

A similar paralysis seems to be gripping the nation on one of the defining issues of our generation.

Australia’s housing debate has become fixated on negative gearing, capital gains tax and whether property investors are getting too much support.

But that debate risks overlooking an arguably more fundamental problem: Australia simply cannot build enough homes at an affordable enough price.

One proponent of that argument is property strategist Steve Douglas, Executive Chairman of SMATS Group.

“I don’t think the crisis stems from what we’re being told,” Mr Douglas told API Magazine.

“In my view, the real crisis is about the fact that we cannot build affordable and efficient homes quickly enough.”

It is an argument that increasingly sits alongside some uncomfortable housing data.

Building approvals for new homes fell 3.6 per cent in July, according to Tuesday’s (1 September) data cited by HIA senior economist Tom Devitt, with approvals for detached houses down 4.5 per cent and multi-units down 2.4 per cent.

While approvals over the three months to July remained 8.3 per cent above the same period a year earlier, Mr Devitt said the pipeline is facing mounting pressure.

“There are long lags between changes in market conditions, building approvals and construction activity,” he said.

New home building had entered 2026 with “good momentum”, supported by strong population growth, low unemployment and a persistent shortage of housing. But Mr Devitt said higher taxes on housing investors, restrictions on SMSF investment in housing, rising interest rates, global conflict and higher fuel costs have interrupted that expansion.

“The effect is already visible in a number of leading indicators across the economy,” he said.

New home sales declined for three consecutive months to July, while investor lending has also fallen sharply.

For Mr Douglas, that is why the political focus on existing housing stock misses the central issue.

“When you start talking about negative gearing and capital gains tax and greedy landlords, the issues that are here get us away from the fixing the problem and shift focus onto the blame,” he said.

The cost of building has to come down

The argument that Australia needs more housing is hardly controversial. The more difficult question is how to make that happen when the cost of producing new homes remains high.

Cotality’s latest Cordell Construction Cost Index recorded a 1 per cent increase in national construction costs during the June quarter, up from just 0.2 per cent in the March quarter. Costs were 2.8 per cent higher over the year.

John Bennett, Cotality’s Cordell Costings Estimation Manager, said the latest result indicates that the softer March quarter was an anomaly rather than the beginning of a sustained decline.

“The return to a 1.0 per cent quarterly increase brings cost escalation back to levels seen prior to the softer conditions seen at the start of 2026,” Mr Bennett said, highlighting “the ongoing resilience of underlying construction cost pressures across the country”.

The numbers are not remotely as severe as the construction inflation experienced during the post-pandemic boom. But they reinforce the difficulty of making projects stack up when margins are already under pressure.

Mr Bennett said suppliers are also dealing with higher fuel, freight, logistics and machinery costs.

“Right now, it’s a waiting game for suppliers,” he said, with businesses holding back from passing on the full impact of cost increases until global economic conditions become clearer.

Annualised dwelling approvals are running at 206,298. This is up 9 per cent from last year but remains well short of the 250,000 level needed to sustainably meet the National Housing Accord target.

Construction costs are only part of the issue.

Mr Douglas points to increasing regulation, government intervention and competition for the construction workforce as additional barriers to getting more homes built.

Governments need to build social housing, which is something he strongly supports, but he argues it needs to be done on a much larger scale and with a greater emphasis on the number of homes delivered.

“If we don’t let enough people build, then we cannot fix the problem,” he said.

Is housing being taxed out of reach?

That leads to one of Mr Douglas’s strongest policy arguments: removing GST from new housing.

His contention is that if governments want more affordable new homes, they should reconsider a tax that adds 10 per cent to the cost of new construction.

“GST cost of 10 per cent on every brand new build, 10 per cent on every brand new apartment is now significant and overwhelming,” he said.

Mr Douglas argued that GST and stamp duty can amount to a substantial additional burden on people buying newly constructed housing.

“We need people to build homes, but we need to make them affordable,” he said. “Getting rid of GST is the biggest way to do it, as is stamp duty.”

It is a policy proposal with an obvious complication: GST and stamp duty are significant sources of government revenue, and removing them would leave governments needing to find that revenue elsewhere.

But the question Mr Douglas raises is whether the housing system can afford to keep taxing new supply while simultaneously demanding substantially more of it.

The Property Council of Australia has raised a similar concern about the impact of tax policy on housing investment.

Matthew Kandelaars, Group Executive Policy and Advocacy at the Property Council, said weaker market confidence makes projects more difficult to finance and puts further pressure on development feasibility.

“The family-owned and mid-tier developers who do the hard yards of housing delivery are already carrying enough risk,” Mr Kandelaars said.

“Bad tax policy means fewer homes and higher rents tomorrow; Australia cannot improve affordability by frightening investment away from new housing.”

His conclusion is blunt.

“You cannot tax the pipeline dry and expect housing supply to keep flowing.”

Investors still matter

That is where the negative gearing debate becomes more complicated.

There is a legitimate argument that first home buyers should not have to compete with investors for scarce housing. And the latest lending data suggests investors have retreated significantly.

Maree Kilroy, Lead Economist at Oxford Economics Australia, said investor lending fell 10.2 per cent month-on-month in June, to $37.1 billion, with particularly large falls in New South Wales and Victoria.

By contrast, first home buyers were the only major demand channel to avoid a decline in value terms.

Ms Kilroy attributes part of that resilience to the increased uptake of the 5 per cent Deposit Scheme, which has allowed first home buyers to borrow at higher loan-to-value ratios.

That represents a genuine benefit from current government policy.

The retreat of investors is also producing opportunities in some markets.

On the Gold Coast, Image Property Director Cameron Cullen said investors have largely disappeared from the entry-level market.

“Most properties in that high $700,000 to $1 million would ultimately always be a competition between investors, first home buyers, and downsizers, with investors often coming out on top,” Mr Cullen said.

“Since the budget, though, investors have gone from 50 per cent of offers to just 10 per cent in that entry-level price bracket.”

The result, he said, is that local owner-occupiers are now buying at levels he has not seen for years.

That is the short-term upside.

The longer-term question is what happens if the investor retreat also reduces the amount of capital flowing into new housing and rental accommodation.

Mr Douglas suggests that investors should be encouraged to buy new construction, rather than simply being treated as the problem.

“I do applaud the government for saying investors can still get the old negative gearing benefits on new construction,” he said.

But the tax incentive alone will not solve the problem, he argues, if the cost of construction remains too high.

“We have to incentivise somehow for investors to provide better housing,” he said. “And it won’t be by just giving a tax incentive; it’ll be like getting rid of that GST.”

The housing supply problem comes first

There is also another tax burden that Mr Douglas believes deserves greater attention: land tax.

He argues that rapidly increasing land tax costs are putting additional pressure on landlords and, ultimately, the rental market.

“Land tax needs to be seriously overhauled,” he said.

“If we want to keep rents sensible and modest, we have to stop dramatically increasing at well above the growth of inflation the land tax cost to all landlords in this country.”

The broader point is not that negative gearing and capital gains tax are irrelevant. Tax settings influence investor behaviour, government revenue and the relative attractiveness of different asset classes.

Nor is the investor retreat necessarily bad news for every buyer. As Mr Cullen’s Gold Coast experience highlights, fewer investors competing for entry-level properties can give first home buyers more room to move.

But those are different questions from whether Australia is building enough homes.

Mr Devitt has warned that the recent investor and lending downturn is already filtering into the new construction pipeline, while the full effect has yet to appear in approvals data.

“Increasing the supply of housing and sustainably improving affordability requires the cost of construction to be reduced,” he said.

Tax changes can alter who buys a home, while deposit schemes can help determine who gets through the door. Investor settings can change the balance between owner-occupiers and landlords. But none of them, on their own, builds the missing homes.

Mr Douglas stressed that the policy challenge is therefore to make construction faster, cheaper and more attractive, while ensuring governments deliver substantially more social and affordable housing as well.

“It’s a big, big issue,” he said of the construction workforce and the cost pressures facing the industry.

“And if Australia does not address those constraints, the danger is that the political debate continues to focus on who owns the homes that already exist, while the country falls further behind on building the homes it still needs.”