Influencing behaviour: Tax changes are divisive but necessary for an equitable housing market

Taxes have been around a while, as attested by records dating back to ancient Mesopotamia in 3300 BC. They were originally based on the production value of land. The term ‘yield’ which we still use in real estate has its origins in the harvest of crops or livestock. A yield was the reflected value of that crop or livestock.

Taxes today are far more expansive than they were. While they are intrinsically unpopular, they’re still essential to a functioning society. They’re used to fund government activities, distribute wealth and shape behaviour. (Think ‘sin’ taxes on alcohol, tobacco and sugar).

Property taxes have a major behavioural impact. In the context of Australia’s housing affordability crisis, they are unfit for purpose. But also act contrary to society’s best interests. As a result, they discourage mobility and hinder the efficient use of dwellings. Recalibrating the tax regime would make a major contribution towards addressing the housing crisis.

Stamp duty & land tax: Encouraging different outcomes

‍Stamp duty is paid by the purchaser based on the value of the property. It makes the process of buying a home more expensive and entrenches ‘stickiness’. It reduces the ability of households to move if their circumstances change. For example, as a household becomes larger or smaller.

House prices have risen at a ferocious pace for a medium-priced home in capital cities since 1980¹. But so too has stamp duty as it has quadrupled in the same period. Buyers in Sydney and Melbourne must pay on average six months’ net income in the form of stamp duty costs.

The Productivity Commission has recommended a more progressive approach. One that replaces stamp duty nationally with a low, broad-based land tax. But this has fallen on deaf ears in the Government. Whereas the ACT is phasing out stamp duty in favour of higher council rates. The NSW government has backtracked on plans to implement the Productivity Commission’s advice. So, other than tinkering with thresholds, no other States are proposing serious reform.

Tax-free homes: Unequitable and inefficient

‍ATO rules exempt the main residence (i.e. family home) from capital gains tax. It’s also excluded from the Aged Pension assets test which determines your pension eligibility. This heavily favours those who own their own home. But more so for those who own high-value properties. It means that retired households whose wealth is in their home can receive the full pension. Whilst retired households whose wealth is in other assets receive less.

Another perverse outcome is it discourages mobility. As retirees may no longer be eligible for the aged pension if selling their home releases equity. Which of course is then held as savings or in some other investment. Retirees are also subject to stamp duty costs on a new property. This creates financial barriers to moving, and only serves to encourage older people to remain in housing that is too big for their needs.

Negative gearing: Making investment more attractive than it is

‍Negative gearing allows investors to claim tax deductions for properties. That is, where a property earns less in rent than the amount of expenses incurred including the mortgage repayments. From 2022-21 ATO data, approximately a fifth of taxpayers (2.3m) claimed rental income deductions on 3.3 million properties². Over half of these investors are aged 50 or older. And over three-quarters were 40 or older.

UK has phased out tax concessions for multiple properties owned by small investors. Applying higher costs to push them out of the sector. New Zealand is also phasing out negative gearing. While in Finland, France and the USA, rental losses can offset future rental income only. So, should Australia follow suit?

The data shows that negative gearing favours older households. There is an argument that incentives for multiple home ownership lowers home supply. Properties that may otherwise have been available to owner occupiers wanting to buy. The counter argument is that without the tax incentive of negative gearing, investors would exit the market. This is due to residential property investment returns being too low (generally sub-3%). So consequently, there would be a withdrawal of stock available for renter households.

Compared to countries like the UK and USA, Build-to rent (BtR) housing is not yet an institutional asset class in Australia. Renter households in Australia are still largely renting from ‘mum and dad’ investors. BtR needs to reach scale before it can replace rental stock owned by the mum and dad investor. Australia still needs to depend on available rental housing owned by non-professional investors. In our next article we discuss the need to professionalise the rental sector.

Financial reforms: Ruffling feathers is no justification for delaying much needed change

‍Existing duty and tax rules inadvertently discourage mobility. This results in an inefficient use of housing stock. They shape the wrong type of societal behaviour by reducing a household’s ability to move based on their circumstances.

The Federal Government banned mortgage exit fees in 2011. The intent was to boost competition. And give customers greater freedom and mobility with their home loans. Likewise, the Government could install similar measures for tax. Stamp duty could be replaced with a progressive land tax instead. Tax treatment of the primary residence could be recalibrated. This would provide greater freedom and help boost household mobility. As well as promote the efficient use of housing stock. Until BtR gains sufficient scale to replace the non-professional, mum and dad investor, it is likely premature to reform negative gearing concessions.

It’s likely that any tax reforms will encounter resistance. But if we are serious about tackling the housing crisis, we need to put in place new reforms. This will ensure our tax settings are not perversely thwarting our efforts to solve the housing crisis.

1. Source: Realestate.co.au. (9 February 2024). “Soaring stamp duty stings homebuyers up to six times more than a generation ago”. Available from: Soaring stamp duty stings homebuyers up to six times more than a generation ago – realestate.com.au

2. Source: Theconversation.com. (5 March 2024). “What is negative gearing and what is it doing to housing affordability?”. Available from: What is negative gearing and what is it doing to housing affordability? (theconversation.com)

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