Labor’s capital gains tax and negative gearing reforms are a welcome start. But fixing housing will require broader tax reform, state cooperation and far greater investment in social housing.
The Albanese government, in a rare show of principle, has secured the passage of reforms to capital gains tax and negative gearing. They are to be heartily congratulated for correcting 26 years of poor policy adding to the range of inflationary measures on house prices in Australia. Many remain but a start on long-lasting positive reform has been made.
The announcement in Jim Chalmers’ 2026 budget was met with the predictable complaints from the property industry, the opposition/s and the Murdoch-manipulated media, focused on the unfairness of it, particularly to start-ups (upstarts?), who have now gained concessions that slightly dilute the changes. Former Treasury boss Ken Henry has argued these have now added a further distortion to our tax arrangements by deferring taxes from current income to future capital gains at a lower rate. Others have defended the changes as reasonable for start-up businesses.
Parts of the housing industry have shouted about the ruination of the housing market, a drying-up of supply, increased rents, robbing the young of wealth-creating opportunities and other calamities. They are the expected squeals of pigs whose snouts have been removed from this trough. Other troughs remain.
As two people who argued against the initial measure to introduce the 50 per cent CGT discount in 1999, we welcome the changes, even slightly diluted, and hope it represents the tip of the spear of tax reform rather than Labor now taking a rest in the comfy chair of “job done”. There is so much more to do.
Once the hullabaloo around the CGT and negative gearing changes has settled, hopefully engineering a minor correction of between 5 per cent to 10 per cent to house prices in Australia – supported by a near majority of Australian households in recent polling – it ought to be possible to move on to broader reforms.
These should start with the prodigiously wrong deal on GST the Morrison government struck with WA (with the support of the then Labor Opposition) and move on to the proper taxation of the nation’s resources. The latter should be a renewed resources rent tax. At the moment, the royalties on extracted non-renewable resources (coal, iron ore) the states and territories charge are not taxes. They are a fee to permit the extraction, not a tax on the profits those companies generate. They vary from state to state.
While it would be preferable to reform the tax base by broadening and raising GST, few MPs or Senators would withstand the political backlash of such a reform. The problem facing the Commonwealth is that Costello assigned all GST revenue to the states. Therefore, negotiations to encourage states to make changes may need to rely on the federal government using section 96 powers to make grants to the states to ‘do the right thing’, conditional on specific changes in housing policies – if you like, bribing them, as Keating and Howard did to get them to abandon outdated retail trading-hour restrictions.
We need to stop adding to the inflationary pressures that persist in Australia’s housing supply. Specifically, states should stop inflating particular markets (such as those first home owners, young people and other low-income groups target) and cease providing first home-owner grants. It has been well demonstrated that grants to first home owners simply add price in those markets. Adding price means larger, longer loan periods for purchasers.
States could also be encouraged to swap stamp duties on housing for land taxes. It is generally considered that stamp duties add price and make other decisions more difficult (down/right sizing) and deter employment mobility. They mean households who move several times in their lives, which various vocations demand, are fundamentally disadvantaged in compared to households who stay in one place. Those who move provide proportionally far more to the support of hospitals, schools etc..
Stamp duties also favour investors over owner occupiers and are a variable source of revenue to states that create boom-bust cycles in state budgets. Land taxes, on the other hand, even out revenues, do not contribute to inflation and encourage households to move to appropriate house sizes and locations.
It is time the federal government found the wherewithal to make changes at state level a condition of grants and national agreements. The Grants Commission could be directed to quarantine any additional revenue from GST distribution depending on the impact of these measures on state revenues.
Perhaps of greatest importance is the need to increase our spending on social housing. With its introduction of the Housing Affordability Future Fund (HAFF), building on the Morrison Governments framework, Labor has committed to improving housing affordability.
The HAFF is an off-budget measure, which uses the Future Fund model to invest $10b, with the annual investment returns/profit spent on affordable and social housing, by paying community housing providers to build and manage social housing but mainly by providing discounts in the rental market. Its target is 20,000 social and 20,000 new ‘affordable’ (discount-to-market) rental homes. Affordable housing is an ill-defined term, generally understood as rental housing charged at 75 per cent of market rent but no more than 30 per cent of household income. The term ‘discount to market’ more clearly defines a home rented at up to 75 per cent of market rents.
While laudable as a program, the HAFF will not manage to keep pace with growing needs and will, at best, maintain Australia’s share of social housing below 4 per cent of all housing. At its highest level in 1996, 6 per cent of all housing was social housing.
The grim reality is we are still managing an overall decline, especially in relation to our population growth. If Australia adds 200,000 dwellings a year (last year it was 176,000), we need to be adding 10,000 social homes annually to maintain current levels. HAFF is promising 40,000 social and affordable homes over five years (2024–2029), or 8,000 per year, mostly affordable rather than social.
To enhance this target, peak bodies and others have argued for a capital grants program in the budget, to provide direct funding to housing providers (either state or community) of an equal amount to the HAFF. This might begin to lift production of social housing above 4 per cent. In a world where Australia can commit $350b to a defence program (AUKUS), we ought to be able to find an additional $10b for social housing. In particular, it would build the capital base of community providers and enable them to further leverage what federal and state governments have been providing. This may not reach sufficient overall supply to our markets but would at least add to the levels of social housing for those most in need.
States have been providing additional funding to social and affordable housing on their own but could go much further. They have also committed to targets set by the Commonwealth for overall housing supply but as the most recent State of the Housing System report shows, there will be further shortfalls in the overall targets.
There are other reforms to our tax system that ought to be considered by a reforming government. It’s an agenda Labor should outline, not as a done deal but as a conversation with the Australian people that allows sensible proposals to be brought to successive elections.
These overdue housing tax changes are welcome; they ought to be the beginning of a process not the final word. Since the Henry Review Australia, we have not had a proper discussion of the need and justification for tax reform to fund a growing list of services and requirements. Here’s hoping this is the tip of the spear not a tip toe through a minefield.
Saul Eslake worked as an economist in the Australian financial markets for more than 25 years, including as Chief Economist at McIntosh Securities (a stockbroking firm) in the late 1980s, Chief Economist (International) at National Mutual Funds Management in the early 1990s, as Chief Economist at the Australia & New Zealand Banking Group (ANZ) from 1995 to 2009, and as Chief Economist (Australia & New Zealand) for Bank of America Merrill Lynch from 2011 until June 2015.
Adrian Pisarski
Adrian Pisarski was the CEO and Chairperson of National Shelter between 2004 and 2022 providing policy advice to the community sector and governments. He is now an independent consultant and writer. He is also chairperson of Jacaranda Housing Co.