Changing tax rules for investors won’t shrink housing supply or raise rents. Just look at Victoria

The Albanese government is preparing to unveil a budget that will recast housing as shelter – rather than a financial tool – in changes that have already sparked heated warnings that rents will rocket and housing supply will be curtailed.

Those warnings are best ignored.

It is now clear that Labor will usher in changes to negative gearing and capital gains tax designed to make property less attractive to new investors.

The government will have ample protection for existing property investors, known as grandfather provisions, which will give it some protection from a political backlash as it transitions Australia away from an unfair system without burning it to the ground.

To be clear, if the anticipated changed settings – a clampdown on negative gearing for future purchases and a less generous CGT discount – means a property is no longer attractive to prospective investors, that’s not a bad thing.

Course correction

Since 2020, investors have increased their share of new home loans from less than 30% to more than 40%, according to Australian Bureau of Statistics data, while owner-occupier levels have fallen.

This is part of a long-term trend, given that the proportion of housing stock owned by investors has been rising for decades.

Traditionally, investors pursued different types of properties to owner-occupiers, but the tax incentives – including the Howard era 50% CGT discount – have been so good that the distinction has narrowed.

That has pitted investors against owner-occupiers across the country.

Michael Fotheringham, the managing director of the Australian Housing and Urban Research Institute, puts it this way: “It has become easier to buy a second, third or fourth home than it is to buy your first home – that’s a problematic policy setting.”

The favourable arrangements have allowed investors to overpay for properties in the knowledge they’ll use negative gearing to their advantage, before richly profiting upon sale, backed by a generous CGT discount.

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This rewards poor decision-making by allowing the investor to recoup their overspend through tax deductions, insulating them from the consequences of paying too much for something.

While Australia’s housing crunch has been exacerbated by housing shortages and poor planning by a string of state and federal governments, the favourable tax settings for investors has made it worse.

Predictions of a market collapse or explosion in rents stemming from the budget reforms rely on an assumption that there will be a mass exodus of investors.