The government is under pressure to scrap capital gains tax (CGT) discounts. Would this be beneficial for the property market or could it potentially cause a crash?
Today’s market is unaffordable. First home buyers are struggling to get in. If you look at the trend of first home buyers entering the market, it’s decreasing rapidly. It doesn’t take a genius to figure out why prices are going up – too many people, not enough houses. So, let’s stop trying to kill off demand in certain sectors and start building supply instead. We’re not building enough houses.
The CGT discount was introduced back in 1999. And it was introduced for a reason, but I swear this debate has been going on since it was introduced. Next, it’ll be negative gearing again.
Why pushing investors out might hurt the rental market
Firstly, you’ve got all the people who are saying, “Oh, we need housing – housing prices are going up too quick. We need to really push investors out of the market so that it provides more stock for first home buyers and makes the properties more affordable at that price bracket.”
Firstly, I think we need to then closely look at what would happen if we then took more investors out of the market. If you took more investors out of the market, we’ve already got less than 1% vacancy rates in a lot of cases and rents are going up 10% a year in most cases as well. So, you look at both of those together and you know, is it a smart idea or not?
And that’s the thing. I get the argument because the market’s unaffordable. First home buyers are struggling to get in. But whether the CGT discount is going to do anything or not is another question.
How the current capital gains tax discount works
At a high level, if you bought a property worth $500,000 and then in 10 years time you sold it and it sold at a million, you’ve got a capital gain of $500,000. Historically if there was no discount when you sell that property and assuming it’s an investment property, that $500,000 profit gets added to your tax return. So then obviously you’re paying tax on $500,000 plus any of the other income that you’d earn that year. You can see how that then becomes quite expensive.
But currently if you meet certain criteria you get up to a 50% discount which is basically that you’ve held the property for more than 12 months in a personal name. It can’t be in a company or a trust. So then you’re only paying tax on the realised gain, so you’re paying tax on $250k instead of $500k in this example.
So there is a definite benefit for investors to do it. So the proposal is that they get rid of that altogether and then you’re paying that 100% capital gains tax and that just increases the tax revenue for the government.
Understanding who property investors really are
That’s essentially the thing is they try to frame these things as a benefit to you before they tax you. A lot of people don’t understand who property investors really are.
If you look at the stats, 90% or more of property investors are mum and dads. And 70% of the market actually only own one investment property. There’s potentially a 9% pool of people who own two properties.
And really all of those mum and dad investors with one or two properties, all they’re doing is trying to set themselves up for retirement or give their kids a better future. They’re not hoarding properties. They’re not walking around saying, “I’ve got a $50 million portfolio.” In a lot of cases, it’s their original owner occupied that they’ve moved out of and made that into an investment property.
These people aren’t greedy or trying to do anything and then all of a sudden you’re going to introduce a tax to say no we’re going to take another 50% off you.
Shifting the focus from demand to housing supply
I don’t agree with it. I think if governments are looking at why prices are going up so high, look at supply. Don’t try and kill the demand in a certain market; start looking at the supply instead.
To just kill off all the investor demand is a stupid idea because investors are a little bit more sophisticated with the market overall. The investors at the top end of the spectrum who own a bigger portfolio might take on a little bit more risk. So they might fund developments. And so there’s more money and more liquidity in a market to incentivise developers to build stock because investors will go and invest in the stock that they’re building.
Instead of hitting investors with a stick and saying go away, push them into a different type of market. Encourage them to build and retain as rentals. Should there be a complete CGT discount for investors who are incentivising new supply? There’s a lot of things you could do. On a state level, they could discount the GST, reduce stamp duty. There’s a lot of different things. High supply is the underlying issue.
You need to incentivise these people that want their one or two properties. Hey, if we go and build a property or a duplex or whatever, we’re going to save x amount by doing so. All of a sudden then there’s two more properties in the rental market. You’re adding supply into the market instead of just taxing people because people need rental properties.
Someone might come from Perth to study at Newcastle Uni or go into a medical field and they need temporary accommodation for 12 months. What happens to those doctors or any professional for that matter who needs to move to an area for 12 months? You need rental properties in a market.
Better options for increasing Australian housing supply
What are some options for increasing supply? There’s so many things that could be getting done instead of just taxing investors. That seems to just be the go-to anytime house prices go up, they focus on the investors. Have they thought that maybe adding a 5% deposit scheme for first home buyers up to $1.5 million in Sydney might be driving prices as well? Are they going to tax them? I’m not saying it’s a bad idea doing these things for first home buyers, but that is really driving that sub 1.5 mil bracket really aggressively.
And we know that owner occupiers drive the market because investors are only around 25% of the Australian market. So you’ve got the majority of the market driven by owner occupied buyers.
Investors take a bit of a broader approach, especially if you’re investing for a long period of time. A property is just a property at the end of the day. If they miss out on a property, cool, they’ll go to the next one.
In summary, taxing people to slow down property prices isn’t a great idea. Not at all. We need to incentivise new builds.