Can tax reform fix Australia's housing crisis? | Insiders On Background

Key Concepts

• Capital Gains Tax (CGT): A tax on the profit realized from the sale of an asset, like property. Originally introduced in 1985, it has been modified over time, notably with a 50% discount for assets held over a year.
• Negative Gearing: A tax strategy where investors borrow money to purchase an asset (like property) and the rental income is less than the costs of owning it (interest, maintenance, etc.). The loss is then offset against other income.
• Housing Affordability: The degree to which people can afford to purchase or rent housing in a specific location. A major issue in Australia, particularly for young people and those on modest incomes.
• Tax Incentives & Investment: The use of tax breaks to encourage investment in specific areas, such as housing.
• Supply & Demand (Housing): The fundamental economic forces influencing housing prices. Limited supply coupled with increased demand drives prices up.
• Intergenerational Inequity: The idea that current policies create unfair advantages for older generations at the expense of younger ones, particularly in housing.

The State of Housing Tax Breaks in Australia

The discussion centers on the Albanese government’s consideration of changes to Capital Gains Tax (CGT) and negative gearing rules, a topic Labour last seriously addressed in 2019 under Bill Shorten, a move that proved politically unsuccessful. Treasury is currently reviewing these policies in preparation for the May budget, coinciding with a Senate inquiry initiated by the Greens and Liberals examining the CGT discount. The core debate revolves around whether these tax breaks incentivize investment and contribute to housing supply, or primarily benefit wealthy investors while exacerbating housing unaffordability for average Australians.

Historical Context & Bernie Fraser’s Perspective

Bernie Fraser, former Treasury Secretary (1985) and Reserve Bank Governor, provides historical context. He explains that the original intent of CGT, introduced by the Hawke government, was to encourage investment. However, subsequent modifications, particularly under Howard and Costello, shifted the focus towards incentivizing wealth creation through housing investment. Fraser argues that these tax arrangements have significantly contributed to the dramatic increase in house prices over the past two decades – a rise that has twice the rate of average earnings increases.

He emphasizes that rising house prices are driven by both increased demand and limited supply. However, he contends that a significant portion of the increased demand stems from the favorable tax treatment afforded to property investment, specifically the combination of negative gearing and the CGT discount. He explicitly states that these incentives haven’t led to increased housing supply, but rather to increased housing demand as an attractive investment opportunity.

Negative Gearing: Current Proposals & Fraser’s Critique

Treasury is reportedly considering limiting negative gearing to the first two properties, disallowing it for subsequent investments. Fraser dismisses this as insufficient, arguing that a more comprehensive approach is needed. He points out that negative gearing hasn’t demonstrably improved rental supply despite being reinstated after a brief period under Paul Keating. He advocates for the complete removal of negative gearing, expressing reluctance to maintain tax arrangements that primarily benefit wealthy investors seeking wealth creation rather than increasing housing availability. He recalls urging Keating to reinstate negative gearing, a decision Keating later regretted due to criticism.

Quote: “I’m a bit reluctant to keep um taxation arrangements there that are conducive to encouraging investment increasing investment in housing by wealthy people who are pursuing it not with the view of establishing more houses but for making attractive investments for wealth purposes.” – Bernie Fraser

Capital Gains Tax & the Need for Bold Action

Fraser believes any changes to CGT should also be substantial, suggesting a reduction of the discount from 50% to 25% as a starting point. However, he cautions that even this reduction wouldn’t eliminate the attractiveness of housing as an investment for the wealthy, especially given the absence of inheritance or wealth taxes. He stresses the importance of prioritizing changes that reduce the tax attractiveness of housing investment for the wealthy, thereby curbing demand and easing pressure on prices.

Quote: “If you're going to do these things, it's often to do them full-bloodedly…cutting down the the discount on capital gains from 50% to 25%. But that's still going to be part of an attractive tax environment for wealthy investors.” – Bernie Fraser

He argues that homeownership should be a right, not a privilege, and that the current system disadvantages those on modest incomes and young couples attempting to enter the housing market.

Supply-Side Considerations & Potential Solutions

Fraser acknowledges the supply-side challenges – limited land availability, labor shortages, and rising material costs – but emphasizes that addressing demand-side factors, particularly tax incentives for investors, is crucial. He suggests exploring tax measures to incentivize increased housing supply, but stresses the need for a clear understanding of the fundamental purpose of housing: providing affordable homes for Australians to live in, rather than serving as a wealth creation tool for investors. He notes that focusing solely on supply-side solutions may prove ineffective without addressing the demand-side pressures.

Political Considerations & the Shifting Landscape

Fraser acknowledges the historical political reluctance to address housing affordability, noting that politicians often benefit from rising house prices due to the voting base of homeowners. However, he expresses hope that the growing number of younger Australians locked out of the market may shift the political landscape, making it more receptive to meaningful reform. He criticizes Shorten’s 2019 proposals for being undermined by unfunded spending promises, but believes the tax changes themselves were worth pursuing.

Quote: “I think that the hope is or my hope is anyhow that Labor was is more concerned about the fairness and and inequity of these arrangements that lead to wealthy investors doing okay but at the expense of average income earners…” – Bernie Fraser

Government Spending & Inflation

Finally, Fraser dismisses the notion that current government spending levels are a significant driver of inflation, attributing the narrative to opposition rhetoric. He suggests that Australians would be willing to pay higher taxes if the revenue was directed towards essential services like housing, healthcare, and education.

Conclusion

The interview highlights the urgent need for comprehensive tax reform to address Australia’s housing affordability crisis. Bernie Fraser advocates for bold, “full-blooded” changes to both negative gearing and CGT, prioritizing the needs of average Australians over the investment interests of the wealthy. He emphasizes that addressing demand-side pressures through tax reform is crucial, alongside efforts to increase housing supply. The discussion underscores the complex political considerations surrounding housing policy and the potential for a shifting political landscape driven by the growing frustration of younger generations locked out of the housing market. The core takeaway is that incremental changes are unlikely to be effective; substantial reform is required to create a fairer and more accessible housing system.