Don’t Impair Market Confidence With Talk Of More Taxes

OPINION PIECE

“Consistent with the recommendations from the Henry Tax Review: Don’t change negative gearing or capital gains tax until supply has been addressed and the purpose of the productivity summit should not be to increase the taxes on housing,” stated HIA Chief Economist, Tim Reardon.

The McKell Institute earlier this week released a report suggesting changes to on investors with the goal of increasing housing supply.

“All parties agree that Australia has an acute shortage of housing,” added Mr Reardon.

“The disagreement is in the extent that investors play a role as the cause of the shortage of housing.

“Australia has 27 million people, and 11 million homes. Even if investors are banned from owning homes, the problem remains that there aren’t enough homes.

“Market confidence in new home building has been improving with a decline in the cash rate. This is good news, as increasing the supply of homes is necessary if Australia is to meet the growth in demand.

“An acute undersupply of housing is evident across all markets following decades of ongoing tax imposts on housing and additional costs imposed by local, state and Australian governments.

“The cause of this shortage of housing is not negative gearing. Investors who have negatively geared have profited over the last 20 years, but this was only possible because very high capital growth eclipsed annual losses. The capital growth was only possible because growth in demand for housing was far greater the increase in housing supply.

“Investors only profited over the last 20 years because they took a leveraged position into an investment strategy that was based on the belief that housing supply would not keep up with demand. It turns out they were correct."

He said that collectively across all levels of government, overregulation made it too difficult to supply enough housing.

“If we don’t want excessive profits to be generated through negative gearing then we need to shift expectations for future capital growth in home prices. This can only be achieved if there are enough homes coming onto the market," Mr Reardon said.

“Addressing the undersupply of homes requires less tax, less fees and fewer regulatory barriers.

“If the goal is to have fewer investors, then the solution is to increase the supply of homes, reducing price growth and rental price growth. If these outcomes can be achieved, then investors will once again exit the housing market for other sectors.

“But investors aren’t the problem, they are simply the symptom of governments failing to allow the market to supply an adequate volume of homes.

“The proposal from the McKell Institute to adjust Capital Gains Tax and Negative Gearing to apply more onerously on existing homes ignores the reality that new homes become established homes, and that this change is simply a change in the timing of the tax impost or a delay in when the government receives the revenue.

“Discussions of tinkering with negative gearing and capital gains tax arrangements adversely impacted market confidence in 2019. Given the low volume of new homes commencing construction, and the large increase in population, discussion around additional taxes is unhelpful to the goal of increasing supply of homes,” concluded Mr Reardon.

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