CGT hike counterintuitive to housing affordability: HIA

Representatives from the Housing Industry Association (HIA) have cautioned that increasing capital gains tax (CGT) on rental homes could worsen the housing affordability challenge, as it would lead to higher rental costs, which will in turn drive up property prices, making the market even less accessible to first home buyers.

Taking this into account, along with stagnating home values and building activity, HIA’s principal economist, Tim Reardon, said that it is currently “not the appropriate time in the housing cycle to increase capital gains tax”.

He added that hiking housing tax will lead to “less investment in housing, fewer houses being built and inevitably a worsening of the affordability challenge”.

“We cannot tax our way out of the housing affordability problem,” the economist argued.

“The solution is less tax on housing and less government distortions on the market, not more.”

Mr Reardon cited a finding from the Centre for International Economics (CIE) that increasing CGT would ultimately slash about $1 billion from state government revenue per year.

“The analysis shows that increasing CGT would generate a revenue gain for the federal government of $0.5 billion a year, which would be dwarfed by stamp duty tax losses to the states in excess of $1 billion per year,” the economist explained.

“The CIE also concludes that increasing the tax on rental homes may initially benefit first home buyers, but over time, this gain will be lost as rental costs rise, leading to higher home prices, that will once again force first home buyers out of the market.”

He is also opposed to grandfathering existing investment properties out of the CGT changes as it would lead to further declines in housing supply and affordability in the long term.  

“Grandfathering reduces revenue from stamp duty to the states by reducing the number of homes built, and [it] delays the inflow of additional CGT revenue to the federal government for decades,” Mr Reardon said.

The HIA economist believes that a greater balance between supply and demand will help improve housing affordability.

A report released by the HIA in April suggested that if the nation’s population continues to increase at the current rate of 1.6 per cent per year, and household income remains relatively stagnant, an average of 215,123 homes would need to be built every year until 2050 to reach a balance between supply and demand. This is compared to the “record” 233,544 dwellings built in 2016. 

However, this requires a “coordinated effort by all tiers of government”, according to Mr Reardon.

“The RBA, the Productivity Commission, federal and state Treasurers have all identified the constraints on the supply of housing as an underlying cause of housing affordability challenge,” the principal economist said.

“Addressing affordability requires coordinated effort by all tiers of government to allow the industry to respond with the type and location of housing required to satisfy the pent-up demand.” 

CoreLogic’s recent housing affordability report shows that housing “affordability” (based on the ratio of household incomes to dwelling prices) has reduced slightly across the nation from its record high of 6.84 in the March quarter of 2018 to 6.81 in the quarter ending June 2018.

[Related: Housing affordability showing ‘subtle improvements’]