How property tax changes would trigger higher rents

The AHURI (Australian Housing and Urban Research Institute) has done a deep dive into the residential market, where vacancy rates continue to hover near a record low of 1 per cent. The report indicates tax changes for property investors will have a bigger impact than ever before, since the number of “mum and dad” property owners in Australia has swelled to more than 2.2 million (or 8.5 per cent of the population, up from less than 7 per cent in 2001).

As the government and the opposition continue to tangle over whether a re-elected Albanese administration would review tax settings, the independent AHURI report shows what the government would discover if Treasury were to model any changes. AHURI modelling finds that negative gearing keeps investors in the property market for longer. It also finds if negative gearing was removed, it would increase the after-tax cost of holding a rental property and reduce the average hold period for rental investments.

In modelling changes to capital gains tax (CGT) – where there is pressure to reduce the current discount by half – the report found halving the CGT discount from 50 to 25 per cent would increase property ownership costs

According to the report, “the probability of landlords selling their rental investment property over time would rise the most among high-income landlords … average rents would rise by 3 per cent, and rental cost burdens would rise slightly across all income groups”.

Asked if the government would get the same outcomes as the AHURI if it modelled tax changes in the property market, Curtin University’s Dr Ranjodh Singh, the lead author of the report, said: “If you were using the same data, I expect you would come up with the same results.”

Ironically, the political push to review property taxes comes just as investors are returning to the residential market after a soft period in which prices went backwards for months – new figures to the end of March suggest overall growth year-on-year in investment lending hit 18 per cent, while owner-occupied grew 14 per cent.

The AHURI report says there is a case for “winding back generous CGT discounts and negative gearing provisions because they contribute to existing inequalities between high-income and low-income landlords and between landlords (who can access the tax subsidies) and renters (who cannot).

“In practice, because winding back CGT discounts and negative gearing provisions will increase landlords’ after-tax economic costs of supplying rental housing, such reforms will need to be implemented incrementally in a transitional manner to avoid destabilising the supply of housing in the private rental market.”

Greens leader Adam Bandt has suggested: “We now have a chance for real reform that will level the playing field for first-home buyers.

“Experts have panned the major parties’ housing policies as a ‘dumpster fire’ that will push up house prices even further, and with millions of people realising we can’t keep voting for the same two parties and expecting a different result,” he said.

James Kirby hosts the twice-weekly Money Puzzle podcast.

This article first appeared in The Australian.