HIA releases new CGT propaganda

By Leith van Onselen

The rent-seekers at the HIA have released dodgy commissioned modelling from economic consultants – the Centre for International Economics (CIE) – warning of housing Armageddon if Labor’s policy to halve the capital gains tax (CGT) discount is implemented:

 “According to research released today, an increase in Capital Gains Tax would result in a $1bn reduction in revenue to state Governments, increase the cost of renting and exacerbate the housing affordability challenge,” stated Tim Reardon, HIA’s Principal Economist.

HIA commissioned the Centre for International Economics (CIE) to investigate the economic implications of changes to the rate of Capital Gains Tax (CGT) on the economy. The Report models the impact on the economy of four different changes to CGT discount rate.

“The analysis shows that increasing CGT would generate a revenue gain for the Federal Government of $0.5bn a year which would be dwarfed by stamp duty tax losses to the states in excess of $1bn per year.

“The CIE also concludes that increasing the tax on investment 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,” added Mr Reardon.

“The RBA, Productivity Commission, Federal and State Treasurers have all identified the constraints on the supply of housing as an underlying cause of housing affordability challenge.

“Increasing the tax on housing will result in 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.

“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.

“The report also finds that grandfathering existing investment properties out of the CGT changes will magnify these problems. Grandfathering reduces revenue from Stamp Duty to the States by reducing the number of homes built, and delays the inflow of additional CGT revenue to the Federal Government for decades,” Mr Reardon concluded.

Contrary to the HIA’s propaganda, unwinding the CGT discount makes sense for a variety of reasons.

First, there are actually significant Budget savings to be made. The Parliamentary Budget Office has estimated that cutting the CGT discount to 40% would provide a four-year Budget saving of $2.3 billion, whereas cutting the discount to 25% would save $5.7 billion over four years, and removing it altogether would save the Budget $10 billion. In a time of deep Budget deficits such savings are money for jam.

Sure, there would be some negative impact on state budgets, but given stamp duties are one of the most inefficient tax bases around, what better way to encourage reform and facilitate a shift towards land taxes than making stamp duties less attractive?

ScreenHunter_6774 Mar. 30 10.24

Second, Blind Freddy can see that investment in existing dwellings has literally exploded since negative gearing was reinstated in 1987, followed by the halving of CGT in 1999. By contrast, investment in new dwelling construction – which is the supply that the HIA bemoans is far too low – has been poor:

By all measures, negative gearing and the CGT discount have been epic failures in achieving the HIA’s goal of boosting new construction, despite their significant cost to the Budget.

Third, there would be minimal (if any) impact on rents from lowering the CGT discount, since more than 90% of investors buy existing dwellings, and therefore do not add materially to supply:

Finally, there is a clear inverse correlation between investor demand and first home buyer (FHB) demand:

Thus, any reduction in investor demand from cutting the CGT discount would unambiguously benefit FHBs, who would no longer be crowded-out.

In short, the HIA has resorted to propaganda rather than a considered analysis of the facts.

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  1. “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.”

    Lol. Fvck off.

    You’ve had 20 years to respond and you’ve done shiit.

    The solution is now some combination of:
    1. Price Armageddon
    2. Migration Armageddon
    3. Tax Armageddon


  2. cycledseasoning

    Prices are going to fall, and that will impact stamp duty revenues, even if FHB demand maintains volume of transactions, which they can’t necessarily, because credit is going to be rationed more conservatively by banks by hook or crook, and potentially immigration will be decreasing going forward. None of these are bad things per se, unless you built your business model or investment strategy around easily gained housing equity year on year. Which is to say, our entire nation’s business model and investment strategy. Which is why all forces will be rallied to ensure it doesn’t happen. Or if it does – inadvertently – then all forces will be rallied to put a floor under it. The immigration tap is the key, and it will be open sluices. APRA can always be forced to back off, the narrative is so easily changed. And really, how many people actually read Macrobusiness?

  3. I’m hoping that the CGT discount becomes less of an issue with all of the negative equity in Australia.

    • To be cheeky, are you hoping that a bad policy isn’t rectified because its effects will seem smaller once a correction begins? That is the sort of selective, hodge-podge, vested interest applauded approach to policy and governance that got us where we are today. It’s akin to the doctor saying “This cancer isn’t as malignant as a few months ago, let’s just leave it in.”. It may be too traumatic for the patient to cut out all the cancer at once, but if the treatment is serious it will need to be removed.

      • No, I’m hoping it is removed. But it makes me feel warm and fuzzy inside thinking about all that negative equity smashing specufestors whilst the CGT discount sits in the background mocking them.

  4. The Wealth Navigator

    I Know MB goes on about capital gains tax and the impact on housing. But has MB considered the impact on other investors. In 2014/15 there was $38.7 billion in capital gains reported by individuals. Just 38% of this – $14.6 billion related to real property. $9.5 billion related to shares and $11.8 billion related to trusts / managed funds (for example when the managed fund you have invested in reports a portion of their distribution as a capital gain). So a policy to change the tax on capital gains to impact housing is likely to hurt people investing in shares / manged funds and trusts by a much bigger factor. So why aren’t the share investors screaming, or do they not understand what would happen if the capital gains tax discount is changed.

    And before any one screams that i have a vested interest, yes I am a long term property investor. But I wonder why if I hold a property for say 25+ years where the inflation would be about 60%, i can only offset a portion and i effectively pay tax on inflation. My proposal (which was submitted as part of the 2019-19 pre budget submissions) is that the discount is stepped over period of ownership to better mirror the previous rules – that way long term holders are not disadvantaged and short term holders are not advantaged

    • Well done, you invented indexation!

      Abolished 20 years ago because Australians were too dumb to understand it.

      • The Wealth Navigator

        Dont need to make it as complicated as it was previously when you had to work out each particular item by quarter and for the sale of a house where you had 10 + years of capital improvements it was a huge exercise to do and keeping track of the right date (invoice / payment / installed ready for use date / etc) was a huge exercise that no one ever got 100% right. Just make it simpler with discount bands depending on how long you owned it.

      • They have computers and smartphones now – maybe someone could write a $2.99 app to do the proper indexation?

        Also your comments on dialling back the CGT discount affecting securities investors aren’t very persuasive. Capital generally needs to be taxed more heavily, to bring it closer to labor (the opposite entrenched inequality; I’ve given up on capital formation and capital deeening, btw, is aussies can only speculate). Also security investors are nowhere near highly geared compared to property, which also reduces the amount of tax rate arbitrage.

      • “Someone could write it”? You could probably get a 10 year old to do it.

        Plus you could just take a photo of your invoice for you home improvement and the app will add it to your cost base and start indexing it for you.

    • “So why aren’t the share investors screaming, or do they not understand what would happen if the capital gains tax discount is changed.”

      It’s because the ALP have been very careful not to advertise the impact of the changes on non-property assets. It’s the same with their negative gearing changes which also apply to shares etc.