As Australia faces a worsening housing crisis, two hot-button issues — negative gearing and capital gains tax (CGT) — have returned to the national agenda. With an election on the horizon, politicians are weighing these controversial tax concessions as potential tools to tackle the housing affordability crisis, sparking widespread debate. The Labor government has confirmed a review of the tax policies is underway, and the outcome of this review could reshape the real estate market, affecting millions of Australians, from home buyers to investors.
At the same time, the government is struggling to pass its Help to Buy housing assistance legislation through the Senate, a scheme designed to assist first home buyers in the low and middle-income brackets. With the housing market growing increasingly inaccessible, the stakes are high for both the government and the public. But while some see changes to negative gearing and CGT as necessary reforms, others argue they could lead to unintended consequences, including a reduction in available rental properties and potential disruptions to broader investment markets.
The Help to Buy Scheme: A Solution or a Stalemate?
One of the government’s key initiatives to address housing affordability is the Help to Buy program. This scheme aims to help first-time buyers by having the government contribute up to 40% of the home purchase price, requiring the buyer to only provide a 2% deposit. Over time, buyers would have the opportunity to buy back the government’s share of equity, giving them a path to full home ownership.
While this scheme offers a novel way to help those priced out of the housing market, it has hit roadblocks in the Senate. The Greens have withheld their support, demanding more comprehensive measures such as rent caps and reforms to negative gearing, while the Coalition has expressed concern over the government “co-owning” people’s homes, stating that such an arrangement is inappropriate and undermines private ownership.
The Help to Buy scheme reflects a broader attempt by the government to tackle housing issues head-on, but its stalling in the Senate underscores the complex and politically charged nature of housing policy in Australia. As rent prices soar and home ownership becomes increasingly unattainable, both renters and would-be buyers are caught in the crossfire of political gridlock.
Negative Gearing and Capital Gains Tax: What’s at Stake?
Central to the current debate are the twin pillars of negative gearing and capital gains tax (CGT), both of which have long been a part of Australia’s tax system, especially benefiting property investors. Negative gearing allows property owners to deduct the costs of maintaining an investment property (such as mortgage interest and repairs) from their taxable income, even if the property is not generating enough rental income to cover those expenses. This enables investors to reduce their tax liabilities, while also benefiting from any capital appreciation when they eventually sell the property.
At the same time, capital gains tax applies to profits made from selling investment properties, but investors can claim a 50% discount on the tax if they have held the property for more than a year. This has become a lucrative benefit, particularly in a market where housing prices have risen sharply in recent years.
However, critics argue that these tax concessions have contributed to driving up property prices, making it harder for first-time buyers to compete with investors. Home ownership across most age groups has been in decline since the 1970s, with younger Australians particularly impacted. Data from the National Housing Supply and Affordability Council shows that households aged 25 to 34 spent about 34% of their income on mortgage costs in 2022-23, a significant financial burden that underscores the challenges younger generations face in entering the property market.
Despite these concerns, any move to reform negative gearing and CGT would face stiff resistance, particularly from property investors. Approximately 10% of all taxpayers were negatively gearing properties in 2020–21, and over 70% of property investors own only one investment property. Proposals to cap the number of properties that can be negatively geared would affect only a small percentage of investors, but the broader impact on the market remains uncertain.
The Impact of Negative Gearing Reforms
There have been suggestions to limit or scale back negative gearing by capping the number of properties that can be negatively geared or restricting it to new-build properties. Such reforms could potentially free up existing housing stock, making it more affordable for first-time buyers. However, detractors argue that reducing negative gearing would discourage property investment, particularly in the rental market, where availability is already tight. If fewer investors buy rental properties, the supply of rental homes could shrink, potentially leading to higher rents for tenants.
Moreover, some experts suggest that these changes may not significantly increase housing affordability. While there may be a small reduction in investor competition, the broader issue of housing supply remains. Without a significant increase in new housing stock, simply reducing the tax incentives for investors may not make a substantial difference in the long term.
Capital Gains Tax: Risks and Rewards
Proposals to increase capital gains tax have also gained traction, but they carry their own set of complexities. As noted, CGT doesn’t only apply to property investments — it affects all forms of investments, including shares. Raising the CGT rate or reducing the 50% discount could lead to reduced investment in housing, but it could also have wider economic consequences.
Furthermore, many property investors hold their real estate in self-managed superannuation funds (SMSFs), which enjoy different tax rules and concessions. The intertwining of housing investments with retirement savings creates a challenging policy environment, where changes to CGT could inadvertently affect Australians’ long-term financial security. Additionally, with property prices having surged in recent years, even with the current 50% discount, investors are likely to face substantial tax bills when they sell.
While reforms to negative gearing and CGT are the most discussed options, many argue that they are not the only tools available to address the housing crisis. Other suggestions include allowing first home buyers to access their superannuation to help fund deposits. However, this option is generally seen as less viable for low- to middle-income earners, who may not have sufficient superannuation savings and would struggle to service a large mortgage on top of their other expenses.
There has also been growing interest in using self-managed super funds (SMSFs) to enable homeownership, allowing people to become tenants in homes owned by their superannuation funds. While innovative, this solution brings its own set of challenges, particularly in cases where relationships break down, leading to complex legal and financial complications.
Another area that has been underexplored is the potential for intergenerational wealth transfers. Given the large amount of wealth tied up in property, there could be mechanisms to make it easier for parents or grandparents to gift or sell properties to younger family members. This could help ease some of the financial strain on first-time buyers, though such policies would need to be carefully crafted to avoid unintended consequences, such as inequities or tax loopholes.
The real issue of housing affordability is multifaceted, and it is unlikely that any single policy change, whether to negative gearing, capital gains tax, or otherwise, will be sufficient to address the problem in isolation. Instead, what is required is a comprehensive and bold approach that tackles the various factors driving the crisis.
Housing Supply, Infrastructure, and Social Policy
One of the key factors contributing to Australia’s housing crisis is the shortage of housing supply. While taxation reforms may alter market dynamics, they do little to address the underlying issue of not enough homes being built to meet demand. Urban planning, infrastructure development, and zoning laws play an equally critical role in determining housing availability.
Governments at all levels—federal, state, and local—need to collaborate to streamline approval processes for new developments, increase the density of housing in urban areas, and invest in transport and public services that make outer suburban and regional areas more attractive places to live. Without increasing the supply of homes, tax reforms alone are unlikely to achieve their intended goals of making housing more affordable.
In addition, there are calls for more robust social housing policies. Australia’s public housing stock has not kept pace with population growth, and there is an urgent need to invest in housing options for those on the lower end of the income scale. Social housing initiatives can alleviate pressure on the private rental market, ensuring that vulnerable Australians have access to secure, affordable accommodation.
The Missing Voices: First-Time Buyers and Renters
One of the most glaring issues in the ongoing debate about negative gearing and capital gains tax is the lack of consultation with those most affected by the housing crisis: first-time buyers and renters. While policymakers and property investors dominate the conversation, the voices of young Australians, who are increasingly priced out of the market, are often absent.
With home ownership rates among younger Australians continuing to decline, it is vital that any policy reforms take into account the perspectives and needs of this demographic. According to recent data, younger households are facing particularly high mortgage costs, with many forced to spend up to a third of their income on housing. Renters are also bearing the brunt of rising property values, with rental prices climbing faster than wages in many parts of the country.
In order to create truly effective housing policies, there needs to be a shift toward more inclusive consultation. Engaging directly with the people who are struggling to buy their first home or find affordable rental housing would provide valuable insights into what measures would have the most impact in real terms.
Toward a Comprehensive Housing Strategy
The debate surrounding negative gearing and capital gains tax is just one piece of the puzzle. A successful strategy to tackle Australia’s housing crisis will need to go beyond taxation policy and incorporate a multi-pronged approach that addresses both demand- and supply-side factors.
- Housing Supply Reforms: Streamlining development approval processes, encouraging higher-density housing in urban areas, and investing in infrastructure that supports suburban and regional growth.
- Social Housing Investments: Expanding public housing stock and supporting the development of affordable housing initiatives to meet the needs of low-income households.
- Rental Market Protections: Implementing policies such as rent caps and longer-term leases to provide security and stability for renters in a tight market.
- First Home Buyer Support: Continuing to explore innovative solutions like shared equity schemes (similar to Help to Buy) and mechanisms for intergenerational wealth transfers, making it easier for younger Australians to enter the housing market.
- Financial Education and Planning: Offering programs to help Australians navigate the complexities of home ownership, investment, and tax implications, ensuring that individuals are equipped to make informed decisions.
As Australia grapples with the housing affordability crisis, the review of negative gearing and capital gains tax offers an opportunity to rethink the role of taxation in the property market. However, any changes must be implemented carefully, with a clear understanding of their potential impact on housing supply, rental availability, and broader investment markets.
At the same time, the conversation cannot remain solely focused on tax policy. To effectively address the housing crisis, Australia needs a bold, innovative approach that encompasses a range of policy solutions, from increasing housing supply and investing in infrastructure to protecting renters and expanding social housing. Only by taking a comprehensive approach can the government hope to create a housing market that works for all Australians — not just investors, but also first-time buyers and renters struggling to find a place to call home.
As the debate around these issues continues, one thing is certain: Australia needs a new housing vision that reflects the challenges of today’s market, rather than relying on outdated tax policies and piecemeal reforms. Only through ambitious, coordinated action can we hope to solve the country’s housing crisis and ensure that all Australians have access to safe, secure, and affordable housing.
