Momentum is building for a revamp of Labor’s housing policies at its national conference in August, with an unnamed senior MP telling The Sydney Morning Herald: “We need to do something radical on housing if this government gets a second term.”
Last week, conference delegate Julijana Todorovic, convenor of the Labor for Housing group, offered a suggestion: limit negative gearing to just one property per person. Some backbenchers are open to it, despite Prime Minister Anthony Albanese’s reluctance.
Conversely, economist Chris Richardson argued that NIMBYs are the main driver of high prices, so governments should forget tax reform and focus on building more homes. Who’s right?
Porque no los dos?
As Ben Eltham recently explained in Crikey, the housing crisis is a multifaceted clusterfuck — lagging private builds, public housing abandonment, and tax concessions are all to blame, plus more. But different housing experts weight each factor’s relative impact differently.
Various think tanks and academics have estimated the impact of Bill Shorten’s tax proposals in 2019 on house prices would’ve been modest — about a 1% to 5% reduction overall, compared with where they would otherwise have been. Deloitte suggests this could’ve reached 8% for Sydney and Melbourne.
Such reductions are nothing to sniff at. But Todorovic’s proposal is smaller than Shorten’s in scope and therefore smaller in potential impact.
The best reason to scrap negative gearing and the capital gains tax (CGT) discount remains the counterproductive siphoning of billions in public funds to landlords and investors. Plus if that extra revenue was put towards public housing, the effect on affordability could be sizeable.
Recent estimates of the impact of boosting supply are more significant. The Reserve Bank suggests that “every 1% increase in the number of dwellings … lowers the cost of housing by 2.5%”. So if Australia followed Auckland’s lead and increased supply by 5%, we could see a 12.5% reduction in relative prices.
However, significantly increasing supply could take a while even absent entrenched resistance, especially since the cost of building materials has risen significantly.
Ultimately, pitting supply and demand-focused reforms against each other is counterproductive. We can and should do both.
Every homeowner is an investor. Tax them accordingly
While negative gearing and the capital gains tax (CGT) discount hog the spotlight, they aren’t the only tax concession for housing that warrants scrutiny. Another reform would have a bigger impact: limiting the CGT exemption on the family home.
Labor, not yet brave enough to disappoint the smaller and more affluent class of non-occupier investors, wouldn’t touch the deified status of the family home with a 10-foot pole. And given the plausible backlash, that’s probably the pragmatic course for now. But if Australia wanted to do “something radical” on housing taxes, this would be it.
The May budget showed forgone revenue from the main residence exemption and its discount component totalled $48 billion in 2022-23 — that’s more than we spent on Medicare, aged care or hospitals, and almost double the cost of rental deductions. Imagine the public housing we could build with that kind of money.
The beneficiaries would still need to be housed, so removing it wouldn’t free up homes for first-time buyers. But it would discourage excessive bidding on existing stock.
Untaxed capital gains encourage buyers to see houses not just as resources for living and raising families, but as investment vehicles and inheritances for their kids, which encourages speculative competition. It also fosters a culture where housing is the mainstream investment choice; where young people, singles and retirees are encouraged to get into or stay in the market, often putting them in financial stress, even if renting would better suit their lifestyle.
And far from being a subordinate concern to NIMBYism, this concession fosters it. If you’ve tipped all your savings into one tax-free cash cow, you’re going to guard its value jealously. That value hinges on scarcity. No wonder so many homeowners weaponise the planning system to fend off nearby developments.
Towards a mansion tax
Earlier this year, the not-exactly-bleeding-heart International Monetary Fund recommended targeting the main residence exemption for reform, telling the AFR it was “more generous than what you see in many other advanced economies”.
We could start by capping it. In 2016, the Australia Institute found the benefits of the exemption are highly concentrated among the richest landowners. And they will become more concentrated as the home ownership rate falls.
Thus researcher Matt Grudnoff suggested limiting the exemption to properties worth less than $2 million, which would claw most new revenue from the top decile of income earners. And if the ceiling was unindexed (like Labor’s $3 million super concession cap wisely was), its coverage would grow over time.
Other areas for reform could include the treatment of inherited homes and homes the owner lived in previously — you can rent your former home for six years and still get the main residence tax break for the entire period.
While investors hoarding a handful of properties when thousands go unhoused might be particularly odious, middle Australia can’t wash its hands — most homeowners are complicit beneficiaries in the ratcheting exclusion of our housing system.
Yet I fear, at least for now, taking the homeowning family off its pedestal might conflict too deeply with our convenient narratives of suburban aspiration. It might simply hit too close to home.
