The Albanese government has announced a significant overhaul of housing tax breaks in an effort to curb house price growth and increase home ownership for younger Australians. Treasurer Jim Chalmers revealed the changes during the federal budget on May 12, signaling a shift away from long-standing property investment incentives.
Starting July 1 next year, the 50 per cent capital gains tax (CGT) discount will be removed and replaced with indexation. Negative gearing will be restricted to new builds from the same date.
Protection for Existing Investors
To maintain market stability and prevent a mass exodus of properties, the government is grandfathering existing investors. Those who owned properties or had signed contracts to buy before 7:30pm AEST on May 12 will continue to deduct rental losses against other income.
This decision aims to prevent a potential flood of properties hitting the market and a steep price fall, as many investors might otherwise be unable to afford their losses without the income tax deduction.
Addressing Intergenerational Inequality
A primary driver for these reforms is the decline in home ownership among young adults. The government noted that home ownership rates for those aged 25-34 fell by 7 percentage points between 2001, and 2021.
Treasury modelling suggests these reforms could result in approximately 75,000 additional owner-occupiers over the next decade, potentially reversing 10 years of decline in home ownership rates.
Impact on Prices and Rents
The government estimates that reduced investor demand may lead to a small, temporary slowing in house price growth, potentially growing by around 2 per cent less over a few years compared to no policy change.
Other economists, including those from the Grattan Institute, predict a drop in home prices of between 1 and 4 per cent. However, some market economists suggest a “short-term shock” could lead to a bulge in investor sales, which may push prices down further.
Regarding rental costs, Treasury expects a small impact, estimating an increase of less than $2 per week for households paying the current median rent.
Shifting Investment to Productive Assets
The reforms seek to move investment away from “flipping” existing houses and toward “productive assets.” UBS equities analyst Richard Schellbach expects a modest shift of investment from property back to the share market.
Schellbach warns, however, that funds may flow toward “income stocks” with franked dividends rather than high-growth startups that reinvest earnings.
Incentivizing New Supply
To encourage the construction of new housing, negative gearing will still apply to new builds. Investors in new housing will also have the choice between using the indexation method or the 50 per cent CGT discount when they sell.
a 60 per cent CGT discount is being retained for specific affordable housing investments. The government is also providing $2 billion to help local and state authorities build infrastructure for new housing estates.
The Victorian Model
The strategy appears to mirror a local experiment in Victoria, where a combination of relaxed development restrictions, higher-density housing, and increased taxes on investors helped Melbourne become one of the most affordable capitals.
While rising interest rates and builder costs may make a building boom unlikely, the government hopes these measures may help avoid another home building bust.
Frequently Asked Questions
When do the new tax changes take effect?
The removal of the CGT discount and the restriction of negative gearing to new builds will take place from July 1 next year.
Who is eligible for grandfathering?
Existing property investors who owned properties or had signed contracts to buy by 7:30pm AEST on May 12 are allowed to continue deducting rental losses against other income.
How will the changes affect new housing investments?
Negative gearing will continue to apply to new builds. These investors can choose between the indexation method or the 50 per cent CGT discount upon selling.
Do you believe these tax changes will make the “Australian dream” of home ownership more attainable for Gen Z and millennials?
