Capital gains tax changes are on the table, and yet Armageddon has not arrived. Has the tide on housing turned at last? | Greg Jericho
silverguide.site –
A funny thing happened on the way to the budget: changes to capital gains tax and negative gearing, which had for years been a no-go zone, are now looking likely.
One of the first times I wrote about negative gearing was in 2015 when I covered the then treasurer Joe Hockey appearing on Q+A. He said negative gearing was needed because when the Hawke government scrapped it in the 1980s rental prices rose.
He was wrong (and to be honest, this was not unusual – a lot of my columns back then involved arguing Joe Hockey was wrong). While rental price growth went up in Sydney and Perth, it didn’t in Melbourne, Brisbane or Adelaide.
Rental prices also grew faster after negative gearing was re-established in Sydney and Brisbane.
In Sydney and Perth, rental vacancy rates were low and thus rental prices rose – and would have risen regardless of what was done to negative gearing.
But the weirdest thing, aside from property developers and their lobby groups continuing to say negative gearing keeps rents down, is that we are now less than a month away from the budget and the mooted changes to negative gearing have barely registered.
The changes have been rumoured for a while, and yet the Liberal party has avoided the issue.
They did not ask one question on housing in the last sitting fortnight.
Independent MP Dr Sophie Scamps did ask one – to call on the government to “commit to reforming our housing tax concessions to address worsening intergenerational inequity”.
The political tide seems to have turned – the parties now know voters want something real done about housing affordability and the massive tax breaks to investors.
The rumour is that the government is looking to limit negative gearing to two properties.
This would cover 90% of people who own an investment property and would pretty much kill any criticism of attacking “mum and dad investors”.
The number of people owning more than two investment properties grew after the capital gains tax discount was introduced in 1999, but has sat about 9% for 15 years now:
Not that many people will cry tears for those owning multiple investment properties, and to be honest this is a pretty minor tweak.
More interesting is news reported this week that the government is also set to change the capital gains tax (CGT) 50% discount.
Prior to Howard and Costello introducing the CGT discount in 1999, negative gearing was not a big deal – you were as likely to make a rental profit as to negatively gear.
But the discount made negative gearing a smart accountancy move and until the record low rates of the pandemic years, negatively gearing was more popular:
We know changing the CGT discount will bring out all the usual claims from the Master Builders Association and the Property Council that the discount encourages investors to build houses and create supply.
Alas, we have 25 years of evidence to show that since the CGT discount has been in operation, housing construction has not improved:
So, no, removing the CGT discount won’t cause supply to collapse, nor will rents go up.
The government is reportedly mulling cutting the discount or (most likely) going back to the pre-1999 method of taxing the “real” capital gains (ie taking into account inflation).
The good thing about going back to the pre-1999 way is that it is hard to mount a scare campaign given the 1990s did exist and life and the housing market carried on – actually quite well, because housing was about buying a place to live in rather than a place to make money:
What this means gets a bit technical. And I apologise now for getting a bit mathematical.
Imagine you buy an investment property for $575,000 and 10 years later sell it for $1,000,000. This is roughly what happened to average dwelling prices over the past decade.
You have made a $425,000 profit or a 74% return.
Under the current system you would pay tax on only half ($212,500), the other $212,500 you get tax free.
If it was taxed by taking into account inflation (the pre-1999 method), and inflation had gone up 20% in the 10 years you owned the property, your “real return” would be 55% so you would be paying a lot more tax than currently – because the bigger your return the more tax you pay. But if inflation had gone up faster – say by 40% then your real return would have been 35% and you actually pay less tax than now:
Personally, I would prefer cutting the discount to 25%, because even taxing real gains remains pretty generous compared to how wages are taxed.
But undoing the Howard-era discount and returning to pre-1999 tax settings would still be good. (Anything that undoes any damage thatHoward has wrought is a good thing).
And that such a move looks close to certain – and yet we are not being threatened with hell fire and Armageddon – suggests that maybe the government should realise that when a policy is popular, vested interest groups have little power.
Greg Jericho is a Guardian columnist and chief economist at the Australia Institute
Comment