The real tax winners in Australia’s housing market aren’t property investors

Despite what many would have us think, the property buyers who get the best tax advantages in Australia are not investors.

Like clockwork, as soon as an election or Federal Budget rolls around, talk in the mainstream media turns to cutting off tax incentives for “greedy investors” and by that they mean getting rid of the misnamed capital gains tax “discount”.

But there’s actually a different type of property buyer out there who is massively advantaged by the taxation system and causing home prices to rise – first home buyers.

First home buyers have major advantages over all other types of property buyers. They are very active in the market right now, driven by government incentives that in turn are driving up property prices.

There’s been a significant uplift in first home buyer activity in the past six months, boosted in part by two Federal Government schemes which, in association with other government support, mean it’s easier and cheaper for first-time buyers to get into the market.

Australian Bureau of Statistics data shows there has been a huge increase in borrowing by first home buyers and there’s widespread consensus among analysts, economists and commentators that the single biggest reason home prices are rising so fast in so many places is because of first home buyer demand.

Don’t get me wrong, I’m not saying first home buyers shouldn’t be given some help to get into the market, I just believe those advocating to remove tax benefits from investors are mistaken in their belief that it will do anything to fix Australia’s housing crisis or make housing more affordable. The only impacts will be negative - particularly for tenants.

First home buyer advantages

First-timers are massively advantaged because one of the federal schemes means they need only a 5 per cent deposit to get into the market and they won’t have to pay Lenders Mortgage Insurance.

With the other federal scheme, they need only a 2 per cent deposit. No other type of buyer has this enormous advantage. Other types of home buyers and investors have to come up with a 20 per cent deposit or they will have to pay a significant sum for LMI.

First home buyers also have access to relevant State Government schemes with various grants and stamp duty concessions. If you buy in NSW, for example, as a first home buyer you pay no stamp duty at all, while other types of buyers will pay $20,000, $30,000 or more in stamp duty for the same property.

There are no state government grants for investors or for other types of home buyers, only for first home buyers.

First-time buyers have other advantages over investors – they pay no land tax or capital gains tax when they sell and they pay lower council rates than investor owners.

Compare three 30-year-old buyers all earning similar incomes – one a first home buyer, another a second-time buyer (someone who owns their home and is relocating) and the third is an investor buyer. All are interested in the same property, with an asking price of, say, $700,000.

Using the various levels of assistance available, the first home buyer will need to come up with just $35,000 as a deposit and pay no LMI - but with the help of government grants may need to come up with less as a deposit. They will pay no stamp duty or annual land tax and no capital gains tax upon selling.

The investor buyer and the second-time buyer will need $140,000 as a deposit – or will have to pay $12,000 or $15,000 in LMI if their deposit is below 20 per cent. The stamp duty will be $26,000 in NSW or $39,000 in Victoria. Investors may have to pay land tax every year and their Council rates will be higher. Investors will also pay capital gains tax upon selling.

Does investor taxation work in other countries?

So why are so many people arguing that investors are the ones who are overly tax-advantaged and are out-muscling first home buyers in the market?

All the evidence suggests this is not true.

Real estate investors contribute more than $100 billion every year to government coffers in land tax, stamp duty, capital gains tax and council rates.

Mum and dad investors provide more than 90 per cent of the 3.5 million homes that tenants occupy in Australia. Property investors are the cash cows for governments of all levels, who seem hell-bent on squeezing out ever more from them, while failing to target the multinational corporations that earn billions of dollars a year in Australia and pay no tax at all.

History has proven what will happen when you tax ordinary investors out of existence.

In the 1980s the Federal Labor Government scrapped tax incentives on residential rental properties, claiming that housing affordability would improve. Two years later those measures were reintroduced because it caused a rental shortage crisis.

New Zealand, more recently, has gone through the same process. It scrapped the tax incentives for rental property providers a couple of years ago – and now they’re bringing them back in.