The Challenge: Australia's Housing Supply Crisis

Australia is grappling with a significant housing shortage, intensified by high immigration and slow housing supply. In response, the National Cabinet established a Housing Accord aiming to deliver 1.2 million new homes over five years, starting from July 2024. This ambitious target requires building 240,000 homes annually.

However, current data paints a concerning picture. Dwelling approvals and completions are tracking approximately 25% below this annual target. A recent Freedom of Information request revealed that even the Australian Treasury privately advised the government that the 1.2 million target “would not be met”. This aligns with forecasts from the National Housing Supply and Affordability Council (NHSAC), which projects a shortfall of 262,000 homes over the five-year period, worsening the nation's housing deficit by nearly 80,000 homes.

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A Proposed Solution: Reforming Capital Gains Tax

To address this supply issue, the Labor-aligned McKell Institute has put forward a common-sense policy proposal focused on tax incentives. The plan suggests reforming the current 50% capital gains tax (CGT) discount for property investors to specifically encourage new construction.

The proposal has two key components:

1. Increase the CGT discount for investors who purchase new units or apartments. 2. Reduce the CGT discount for investors who purchase existing detached homes.

The institute claims this targeted approach could stimulate the construction of an additional 130,000 homes by 2030, putting downward pressure on rents by increasing available supply.

The Rationale: Steering Investment Towards New Supply

The core problem with current tax settings is that they often encourage investment in established dwellings, which does little to increase the overall housing stock. As report co-author Richard Holden states, “A key problem with our existing tax settings on property is they orient too much investment toward established dwellings, at the cost of new supply”.

This proposal aims to harness investor demand and channel it towards our national housing objectives. By making new builds more financially attractive through tax incentives, the policy encourages capital to flow where it's needed most—into creating new homes. This is a critical aspect of any sound investment analysis in today's market.

Our Analysis: A Sensible, Not Magical, Solution

At HouseSeeker, we see this as a logical and pragmatic policy shift. While it's unlikely to be a silver bullet that magically solves the entire housing crisis, it represents a step in the right direction. The policy is expected to have a modest but positive impact on supply and could be revenue-neutral for the government.

Furthermore, the logic holds up when considering property types. Apartments typically have a lower land-to-asset ratio and therefore appreciate less than detached homes. Offering a larger CGT discount for apartments compensates investors for this difference and rightly incentivises the higher-density housing needed in urban areas. Ultimately, this is a common-sense change that offers net benefits for renters, investors focused on new builds, and the broader community.

Conclusion

Australia's path to solving its housing shortage requires innovative and targeted policies. The McKell Institute's proposal to reform the CGT discount is a strategic move to align investor activity with the national need for new housing supply. By incentivising investment in new apartments, this policy could help ease the supply crunch, provide relief for renters, and create new opportunities for savvy investors.

As the market evolves, staying informed is crucial. Understanding these potential policy shifts is key to making smart investment decisions. To stay ahead of the curve, explore the powerful real estate analytics tools on HouseSeeker and discover data-driven insights to guide your next property move.

Frequently Asked Questions

What is the proposed change to the Capital Gains Tax (CGT) for property investors?

The proposal suggests increasing the current 50% CGT discount for individuals who invest in newly built apartments or units, while simultaneously reducing the discount for those who purchase existing detached homes. The goal is to make investing in new supply more attractive.

Why is this CGT change being suggested?

This policy is designed to address Australia's chronic housing supply shortage. By incentivising investment in new construction over existing properties, the government hopes to increase the number of available homes, which could help stabilise the market and put downward pressure on rents.

How could this policy affect property investors?

Investors focusing on new apartments could benefit from greater tax concessions, potentially improving their net returns. Conversely, investors who typically buy existing houses might see their tax benefits reduced, which could influence their investment strategy. It highlights the importance of using detailed market trends to assess opportunities.