Reward investors who build: The smart plan to ease the housing squeeze

Tweaking a generous property tax break could see up to 130,000 additional homes built by 2030 at no extra cost to the government, according to new research.

“Harnessing Aspiration” - a new paper from the Labor Party-aligned McKell Institute - says relatively minor changes to the Capital Gains Tax (CGT) discount could be used to encourage investors to build more apartments, increasing housing supply and helping to keep a lid on soaring rental costs for tenants.

The research - which has been compiled as a submission to an Albanese government economic reform summit in Canberra next month - was authored by the McKell Institute’s CEO, Edward Cavanough, and University of New South Wales economist Professor Richard Holden.

The CGT discount

Capital gains tax (CGT) is the tax paid on profits after disposing of investment assets, NOT your own home.

Here’s an example from the Australian Tax Office (ATO) as to how the CGT discount works when it comes to property

“Justin, an Australian resident, buys a block of land. He owns it for 18 months and sells it, making a profit of $10,000. He has no capital losses.

“Justin is entitled to the 50% CGT discount for the land. He will declare a capital gain of $5,000 in his tax return.”

That big discount on taxable profits is one of the reasons residential property is such an attractive investment in Australia.

And that’s why scrapping or curbing the CGT discount has been on the radar of political parties in the past, including Labor.

The well-known finance and economics commentator Alan Kohler argues that the introduction of the Capital Gains Tax discount in 1999 by John Howard and Peter Costello marked “the beginning of the end of affordable housing” in Australia.

“The 50% CGT discount supercharged the impact of negative gearing and led to investment property becoming everyone’s tax dodge,” he says.

The McKell Institute Proposal

"The CGT tax discount is neither good nor evil,” says McKell Institute’s CEO Edward Cavanough, “but it should be better calibrated to actually achieve our social aims.”

“Instead of encouraging property investors to bid up the price of existing housing stock, we should be encouraging them to contribute to the construction of new dwellings.

“Our modelling shows that with a couple of simple tweaks, the government could stimulate supply without affecting the budget bottom line," he says.

In their paper “Harnessing Aspiration”, Mr Cavanough and Professor Richard Holden suggest the following “tweaks”:

Increase the CGT discount on new attached (apartments and townhouses) builds to 70%, up from the existing 50%.
Decrease the CGT discount on existing detached (free-standing) dwellings to 35%, from the existing 50%.
Leave the CGT discount on new detached (free-standing) dwellings unchanged at 50%.

All existing investments would be "grandfathered" and there would be no changes to negative gearing.

Richard Holden and Ed Cavanough say their proposal would:

Have a positive impact on the budget. (They estimate the changes would be revenue-neutral in five years and see a $1.4 billion positive impact within 10 years.)
Increase housing supply by between 0.70 and 1.20% by 2030, meaning up to 130,000 dwellings additional to those currently forecast would be delivered, with New South Wales and Victoria seeing the biggest uplift.

The McKell researchers say they’ve calibrated these proposed reforms to:

Benefit first-home buyers by encouraging more investment into new dwellings and giving first-home buyers a better chance at auctions.
Benefit renters by moderating rents through the creation of more housing supply.
Reward first-time investors by creating more opportunities and incentives for ‘Mum and Dad’ investors to enter the market via more affordable new builds.
Benefit taxpayers by ensuring the revenue lost - or the ‘tax expenditure’ - on the CGT discount is oriented towards a “productive outcome” in line with Australia’s national housing goals.

Richard Holden says the hard reality is Australia just isn't going to hit its objective of 1.2 million additional homes by mid-2029 if existing policy settings are retained.

“A key problem with our existing tax settings on property is they orient too much investment toward established dwellings, at the cost of new supply,” he says.

"There is nothing wrong with the commonly held desire of everyday investors to secure their future by investing in the housing market.

“But this desire should be harnessed to achieve our national objectives on housing supply," Professor Holden says.

Ed Cavanough agrees.

"Labor has resisted change to the CGT for too long,” he says.

“It needs to creatively reform this poorly targeted tax concession so it works both in the interests of aspirational Australians and society more broadly.”

I’ve always argued that investing in well-located new homes is the best way of creating wealth through real estate.

Making small changes to tax policy to reward “Mum and Dad” investors who add to Australia’s housing stock at no extra cost to the government seems like a no-brainer to me.