Federal Government’s proposed changes to capital gains tax and negative gearing

Recent discussion around potential changes to capital gains tax concessions and negative gearing has once again put housing policy in the spotlight ahead of the Federal Budget.

Public commentary has included possible reductions in the capital gains tax discount, including suggestions it could be cut from 50% to around 30%, 33% or 25%. There has also been discussion about potential changes to negative gearing, such as limiting the ability to offset investment losses against other income or narrowing how these deductions can be used. Other commentary has suggested different tax treatment for new housing compared with established property.

While no final policy has been announced, the debate highlights the importance of understanding how tax settings influence housing investment and rental supply.

At LJ Hooker, we believe any policy change that affects housing investment needs to be considered carefully, particularly at a time when Australia is still trying to build its way out of a housing undersupply.

The biggest challenge facing the housing market today is not demand, it is supply. Population growth has remained strong, rental markets are tight, and the pace of new housing construction is not keeping up with the number of homes Australia needs.

The Federal Government’s key housing target is to deliver 1.2 million new well-located homes over five years from 1 July 2024 to 30 June 2029. However, the latest official outlook indicates Australia is well off track to meet that target.

Private investors continue to play a central role in Australia’s housing system. The majority of rental housing is supplied by private “mum and dad” investors rather than government or large institutions. In many cases these investors are small scale owners who own just one property. This means private investment is a key part of how Australia provides rental housing.

If private investment activity slows before new housing supply improves, the likely outcome is fewer rental properties available for tenants. In that scenario, the responsibility for replacing that rental supply would increasingly fall to government through public housing, community housing and other supported housing programs.

Without a significant increase in government funded housing supply, a reduction in private investment could lead to tighter vacancy rates and additional upward pressure on rents.

There is also a risk of unintended short-term disruption. If investors believe the current capital gains tax discount could be reduced or removed, some may choose to sell earlier to take advantage of the current settings, creating a temporary lift in listings. But investors are generally agnostic to asset type, and if residential property becomes less attractive, there is no guarantee that capital will stay in housing. If those homes are not bought by other investors, the result could be a smaller rental pool and tighter rental supply over time.

This does not mean housing tax settings should never be reviewed. But now is not the right time. A broader discussion around changes to capital gains tax concessions or negative gearing may be more appropriate once Australia is much closer to meeting its housing supply targets, or at least clearly on the path to doing so.

Housing affordability is an important national issue, but it is unlikely to be solved through policies that discourage investment in a market already facing a shortage of homes. The most effective long term solution is to increase supply. Planning reform, faster approvals, infrastructure delivery, improved development feasibility, and stronger support for residential construction will all play a more direct role in addressing the underlying shortage of housing.

For this reason, LJ Hooker believes housing policy should remain focused on measures that support the delivery of more homes, rather than changes that may unintentionally reduce the flow of private capital into the sector.

Australia needs more housing, more construction, and greater confidence for long term investment in the property market. Policies that support supply will be critical to improving housing affordability over time.