Housing tax reform: what difference will it make?

by Brendan Coates


Presentation to the NSW Affordable Housing Conference, Wednesday 27 June

Public concern about housing affordability continues to rise in Australia. And the debate is shifting. Many commentators argue that reducing tax breaks for housing will reduce demand, particularly from investors, thereby making housing much more affordable. The Federal Opposition went to the last election proposing to halve the capital gains tax discount and limit negative gearing only to investors purchasing new homes.

But in this presentation the NSW Affordable Housing Conference, Grattan Institute’s Australian Perspectives Fellow Brendan Coates asks what difference housing tax reforms would make to affordability?

Reducing the capital gains tax discount and abolishing negative gearing would improve housing affordability a little, and more at the bottom of the market. They would do more to improve the budget bottom line and boost the economy. Including the value of the family home in the Age Pension assets test would make our retirement incomes system fairer, but few extra seniors would be likely to downsize. Replacing stamp duties with a broad based property tax would make it easier for people to move for a new job, or find a house that better suits their needs. But these reforms combined are unlikely to reduce house prices by more than 10 per cent, and probably by a lot less.  Boosting the supply of housing will have a bigger impact on affordability, even if it will take more time.

Meanwhile, reforming progressive state land taxes could improve tenure security for renters by encouraging institutional investors into residential housing who would be more willing to offer long-term leases. Progressive land taxes levied on total landholdings and generous tax-free thresholds discourage larger landholdings and largely explain why small investors dominate Australia’s rental housing market. Institutional investors are probably more willing to offer long-term leases to tenants, for two reasons: they are less likely to face cash-flow problems or the need for portfolio diversification that can force sales by small-scale investors; and they can pool the risk of leasing any one property to a bad tenant across the many properties owned. Consequently, institutional investors are will probably be less concerned with  tenancy laws that provide more secure tenure to renters.