$84bn lost to housing tax lurks? That would go a long way towards ending the housing crisis

Australia’s deep housing crisis is causing enduring and widespread harm. A key impact is that it is increasing inequality.

The children of parents who have paid off their mortgage and have disposal income are far more likely to become home owners. They will be better off as a result. On the other side of the coin, a growing proportion of young Australians feel they will never be in a position to buy a home and will be lifelong private renters.

It has been powerfully argued that an overly generous tax regime has fuelled the housing crisis. Figures released recently by the Parliamentary Budget Office reveal the enormity of the tax revenue forgone due to negative gearing and capital gains tax concessions on residential property. This lost revenue over the past ten years totalled A$84.11 billion.

Some recent polls suggest a majority of Australians now support limiting or abolishing these tax concessions.

Ideally, the government would reform a tax regime that strongly encourages the financialisation of housing, meaning it’s now seen as a financial asset and investment. As a result, potential home buyers must often compete with investors who are prepared to pay more, driving up prices.

What’s more, if the lost revenue had instead been available to invest in building social housing, it would have been almost enough to clear the long waiting lists across the nation.

What exactly are these tax concessions?

Negative gearing applies in a situation where “expenses associated with an asset (including interest expenses) are greater than the income earned from the asset […] Individuals who are negatively geared can deduct their loss against other income, such as salary and wages.”

Essentially, residential property investors use negative gearing to reduce their tax.

Read more: What is negative gearing and what is it doing to housing affordability?

The capital gains tax concession greatly reduces the tax on profits from selling property. Investors who have held the property for more than 12 months are only taxed on 50% of its increase in value when it is sold. If a person sells their own home, that is the one they live in, they are not subject to any tax, however great the profit.

In opposition, the Labor Party went to the 2016 and 2019 federal elections promising to halve the 50% capital gains tax deduction and limit negative gearing to new properties only. The latter reform was designed to increase the incentive to build new homes.

There is a perception within the Labor Party that the Coalition’s attack on these policies contributed to Labor’s surprise defeat in 2019. Labor dropped the policies before winning the 2022 election. The government now appears averse to any mention of scrapping or adjusting these measures.

Read more: Now it's Liberals telling us we are going to have to cut the capital gains tax concession if we want to get Australians into homes

Lost revenue could fund badly needed housing

In response to the housing crisis, the federal government has put in place a range of measures it says will increase the supply of social and affordable housing. Its target is at least 30,000 homes over the next five years. (The total is made up of 10,000 affordable housing and 20,000 social housing units.)

The effect of policies announced so far is a drop in the ocean compared to the depth of the housing crisis. An analysis of 2021 census data found about 640,000 Australian households, or one in 15 households, were not in affordable or appropriate housing. That is, they were homeless or in housing that was overcrowded or they could not afford.

As for social housing, by June 2023 184,100 households were on waiting lists nationally. Of these households, 69,700 were assessed as being in “greatest need”.

Of course, it’s a challenge to find the money to build enough housing to meet this level of need. But acting on the revenue lost to negative gearing and capital gains tax discounts could make a huge difference to both the housing crisis and government’s capacity to resolve it. Labor recognised this in the past.

Imagine if the $84 billion in revenue forgone over the past decade had been available to invest in building social housing. If each dwelling cost $500,000, 168,000 homes could have been built. That would have been enough to all but eliminate social housing waiting lists across the nation.

And, as the chart below shows, the revenue forgone is expected to soar over the next decade. Compared to the past decade, the Parliamentary Budget Office predicts the cost to the budget of negative gearing will increase nearly three times and capital gains tax by around 50%. In combination, the revenue forgone is projected to double to an astonishing $165.58 billion.

Again, if hypothetically $165.58 billion was put into building social housing and each dwelling cost $500,000 to build, more than 330,000 homes could be built over the next ten years.

These figures would be very difficult for the Coalition to dispute. If Labor had the courage to act on its original convictions and the advice of economists, and housing scholars, it has 165 billion reasons to once more put adjusting, or ideally scrapping, negative gearing and capital gains tax concessions back on the table.