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Most housing affordability plans are a waste

(In response to Chris Cuffe's article last week on the CGT discount).

Housing affordability continues to dominate the headlines, and as usual, there is no shortage of suggestions how to make housing more affordable. Unfortunately, most of these ideas are impractical – implementation of any of them would simply increase the ability of first home buyers to buy a home and so increase demand. The only possible outcome of increasing demand is to push prices up even further, and continue the vicious cycle.

Think First Home Savers Grant, reduced stamp duty for first home buyers, and the ludicrous suggestion currently being debated that would allow first home buyers to access their superannuation for a house deposit.

Just last week we even had the Governor of the Reserve Bank, Phillip Lowe, hinting that consideration should be given to reducing the capital gains 50% discount that is currently available for investors who have owned an asset for over a year.

My view on CGT changes

Capital gains tax (CGT) was introduced by the Hawke Keating Government on 20 September 1985 as part of a general reform of the tax system. Prior to that, tax could be levied at full marginal rates on capital profits if the ATO decided that the owner’s purpose when acquiring the asset was to re-sell it at a profit. This was a grey area, and many investors simply did not know what the taxation position would be on sale of an asset until the sale was completed and their tax returns were lodged. It was a nightmare.

There has long been general agreement that capital profits should be adjusted for inflation. This is why the Hawke Keating CGT legislation allowed investors to adjust the base cost for inflation before CGT was assessed.

But it was a different world then: interest rates were 14%, inflation 10%, and the top marginal tax rate was 60%, which cut in when income reached $35,001.

Given those numbers, it was quite a reasonable deal in 1985. The downside was that adjusting the base cost required onerous record keeping, especially with dividend reinvestment, requiring a separate cost base to be kept for each investment.

The Howard Costello Government simplified the system, effective from 20 September 1999, replacing the indexation method with what we have today – a 50% discount applying to assets held for more than 12 months.

Consider changing one year to five years

What is the logic behind calls to make housing more affordable by changing the 50% discount after 12 months? There is anecdotal evidence that some investors in Sydney are buying properties for a quick turnaround, and increasing the qualifying time for the discount may deter a few of them. But, given buying and selling expenses, you would need to make a hefty gross profit to make much real money, even with 50% off the CGT.

Being a long-time proponent of investing for the long haul, I have no problem with increasing the time that an asset may be held before the 50% discount is available. Even stretching the current one year to five years would not be unreasonable.

Faith in residential property would remain

But you are living in la-la land if you think that will make one iota of difference to housing affordability. The majority of investors in residential property are invested there because they are tired of the never-ending tinkering with the superannuation system, they do not trust shares, and they realise that money in the bank is never effective as a long-term investment. For them, residential property – usually held long-term – is the only way to go. Demand from these investors will continue until reasonable alternatives are available, which may be light years away.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. This article is general in nature and readers should seek their own professional advice before making any financial decisions. Email:


Reply from Chris Cuffe

The key premise of my article is that adjusting CGT for indexation is more equitable than a simple discount factor. It was not meant to say that if you do this one single measure, it will DEFINITELY cool the housing market. Housing affordability will need a range of policy issues, but this would be one less reason for investors to use tax as a motivation for buying property.

I repeat the quote in the article from a leading tax expert in Treasury:

“The concessionary treatment of capital gains income is arguably the primary motivation for financial investment in negatively geared real estate, which aims to shift all of the investment return into the capital gain on the eventual sale of the asset.”

I would expect that if the CGT discount was changed to indexed gain AND negative gearing was restricted to the said property income (ie can’t reduce other income) THEN there would be a material amount of heat taken out of the market.

Following my article, I was referred to some research called ‘Mythbusting tax reform’ by Deloitte, and its detailed analysis of the CGT concession. A table and a chart are worth highlighting.

In the words of Deloitte: “Table 1 shows there are really big incentives for some taxpayers (such as high income earners) to earn capital gains, versus little incentive for others (such as companies).”

Chart 6 shows the rapid rise in investor activity in housing markets since the discount was introduced. Deloitte also shows that those earning more than $180,000 a year receive a larger share of net capital gains.

Deloitte concludes on CGT: “The discounts Australia adopted back in 1999 assumed inflation would be higher than it has been – and so they’ve been too generous.” Exactly my point.

If it’s true, as Noel says, that changes to the tax treatment would not change investor demand, then at least the budget would be improved by increased tax collections.

I’m also not as convinced as Noel that investors are only interested in residential real estate, as if it had no competition from other investments. Flows into managed funds are massive at the moment, motivated by investors having a last grab at the higher superannuation caps before the 1 July changes. Products such as ETFs and LICs are experiencing strong growth. ETFs in Australia had net inflows of $467 million in February 2017 alone, and there are three new LICs in the market hoping to raise a combined $1 billion. Additional boutique fund managers are still being launched every week, and share market investors have experienced excellent returns with lower volatility in recent years. I’m not doubting people are worried about global macro trends, but nevertheless, investors have driven the world’s largest exchange to an all-time high.

March 23, 2017

The main reasons for high house prices in the 'colonies' is rather easy. Very high Net Immigration, and very strict Planning Controls, and not much Bribery, that applies to Aust, Britain, Canada, NZ, and much less to the USA.

Chris M
March 17, 2017

There are just too many investors. I looked at a suburb on in Sydney's west.

I counted 7 house for sale. Most for Auction. There were 21 houses for rent. Price to rent ratio is about 50 to 1, or 2% yield.

When are regulators and politicians going to see that we are creating social/inequality problem. Not just a bloody financial one.

Chris M
March 16, 2017

There should be no discount. Keep it simple. Even it with bank interest.

The haircut on Rental Income should be increased from 20% to 50% or more. Investors get to leverage against untaxed capital gains. This should help even up things against first home buyers.

It would also force properties onto the market, especially positively geared investors, thus increasing affordability.

Graham Hand
March 16, 2017

Hi Paul, depends on the assumption on the age of the 'average house buyer', but according to ASFA, the mean superannuation balances by age are: 20-24 $5K, 25-29 $16K, 30-34 $31K, 35-39 $45K. Won't go far in most capital cities. If these are means, then some have decent balances.

March 18, 2017

Thanks for putting some figures up Graham. I suspect that those who have the decent balance may have been putting in extra funds surplus to house deposit requirements. And the others clearly don't have enough. As you say won't go far in capital cities so pollies should just come out and knock it the head.

March 19, 2017

Graham what would happen if all those 290 and 30 somethings suddenly used their full $25,000 concessional cap? State governments would receive a huge boost in stamp duty as superannuation funds are used for property purchases but eh Federal Government would see a large drop in a income tax as young people swap 34.5% or 39% marginal tax rates for 15% contribution rate.

young tradies and white collar workers on decent money could live at home and contribute to the max for a decade and then access $212500 (net contributions) + growth of superannuation account to buy the property. The hit to the income tax base would be huge.

March 16, 2017

Wondering just what level of superannuation contributions have been made for the average first house buyer? Given age, time in workforce and SGC rate and also taking into account that these folk would (should?) have been putting every spare dollar into a house deposit and not a super fund, is the debate about using funds for a deposit even meaningful?

March 16, 2017

Taking just one comment from above : "the ludicrous suggestion currently being debated that would allow first home buyers to access their superannuation for a house deposit."; this is an arrangement that has long been in place successfully in Singapore (and possibly elsewhere) which has resulted in many people being able to buy their home when they couldn't otherwise afford to do so.
Could those who can run the numbers advise us what is the outcome at, say, retirement, of having bought a home out of superannuation money, with the consequent saving over time of mortgage interest and rent, versus the lower super-generated pension at retirement, but with no rent to pay in retirement..

John O'Connell
March 16, 2017

the larger issue with this approach is the concentration risk in an asset that is ill-suited to providing a retirement income stream.
Yes, when the house is paid off enables 'no rent' in retirement ... but if the initial entry price versus wage is so high as to crowd out all other investment (eg superannuation) ... then the retiree is left long an illiquid house and short liquid investments upon which to draw for day to day living expenses
The result is high house prices ... but the occupant reliant on government pension (next generation paying taxes ... ironically lowering that generations ability to afford a house) ... that is what nudges the debate about means testing the family home in pension eligibility, essentially creating the incentive to 'downsize', meaning release equity from the concentrated asset for day to day living.
Contrary to popular opinion, direct Property is actually an asset ill-suited to retirement portfolios due to its 'lumpy' nature, and hence timing risk of any necessary sale. During the accumulation years, this is often overlooked, as there is a salary/wage upon which to rely for day to day living.
Don't think of the concentration risk through the lens of Sydney and Melbourne at present (where any investor is happy riding concentration risk when price is booming upwards) ... think of if the superannuation balance was drawn upon to buy your residence in a mining town in 2008 ... the concentrated portfolio of a single (and leveraged) asset that has fallen substantially in price locks the purchaser (due to negative equity) into a town that now also has poor employment prospects.

Keeping super separated for 'retirement income' is an important pillar of our self funded: 10% of YOUR salary (ie defined contribution - meaning beneficiary is shouldering the outcome risk) system.


March 18, 2017

Agree about the "lumpy" nature John.
If you need some extra pension you can't just sell a door!!

Indeed should we allow negative gearing in a super fund anyway? Is this also contributing to the problem?

March 16, 2017

Increasing the 50% CGT discount qualifying period to 5 years sounds like a good way to get investors more focused on the long term for growth assets. Excellent suggestion Noel!

While a "perceived lack of acceptable alternatives" may play a part in property purchase decisions, my observation is that federal government concessions and incentives are also strong drivers of behaviour. CGT discount rules are part of it, but there are others including:

- ability to offset property losses against salary income
- uncapped CGT exemption for the principal residence
- uncapped welfare means test exemption for the principal residence
- allowing borrowing in super to purchase property

These demand boosting factors not only drive property prices higher, they are a considerable drain on the public purse. They could all be easily reined in gradually over time, without any need for drastic property market shocks.

John O'Connell
March 16, 2017

I'm on Chris' side in this debate.
Bottom line the housing affordability issue is high prices due to demand in the two major cities - Sydney and Melbourne. Some of this is exogenous to the RBAs ability to influence with interest rates. The factors include:
- favourable tax treatment
- ability to negative gear against salary and wages income (one of the few that allow this)
- ultra-low interest rates
- increasing numbers entering retirement looking for steady income steams ... this means lost of gearing into investor apartments to get a 'bricks and mortar safe yield' (sic)
- a Minsky backdrop ... long period of stability breeds the instability ie it eventually gets to 'ponzi' finance where assets are bought on interest only loans where the income stream doesn't cover the financing payments (negative cashflow), so only way to be a positive investment is to expect to sell to another at a higher price (sound familiar?)
- strong foreign buying interest for reasons outside of 'roof over your head', investment returns
- still strong immigration numbers (with a points system that favours people with the ability to buy)
- lack of land release
- clustering of knowledge workers, immigrants, and foreign buyers to the two major cities

a multi-factor problem means it will require a multi-factor solution. So yes, you can say changing CGT won't SOLVE it ... but equally changing any one of the other variables won't entirely solve it either (without a sledgehammer approach). But just tighten a little on each 'incentive' and you may bring it within the bounds of reasonable ... hence CGT update for todays environment is a step in the right direction

To my mind it is about trying to find an equitable future, rather than keeping us baby boomers happy like pigs in mud with lots of ultra-pricey assets, courtesy of 30+ years of resisting Schumpeter's creative destruction cleanse that is the mean reversion of the capitalism model ... ignore it, and you always get your "Minsky moment".


March 16, 2017

There are many factors influencing housing affordability but the one that rarely gets a mention is the point you make on your last bullet:

"clustering of knowledge workers, immigrants, and foreign buyers to the two major cities"

There are some great cities to live and work in Australia if only there was some career employment.

Instead of offering company tax breaks to all lets target them to companies that will invest in meaningful careers in our very livable Regional towns.

Lets start with the excellent Regional University towns and change the paradigm where city students don't just board and study there, but have meaningful careers to follow in local growth industries. Government could always kick this off by moving career work to these centres themselves.

Such an approach would ease the pressure on city infrastructure plus provide a justification for building Regional infrastructure and have the biggest long term impact on the productivity of Australia.

Maybe we would see a high speed train from Brisbane to Melbourne, that is if we ever finish the Pacific Highway.

March 16, 2017

This won't work, because of the existing NG/CGT tax arrangements. As soon as successful decentralisation occurs, speculators will deploy their inflation-generated leverage to buy up the tranche of newly desirable properties.

Gary M
March 16, 2017

It won't take too many increases in interest rates to take the steam out of the market, and once there is little promise of capital gains (given there is little in net rental returns), the market will flatline or fall. The big unknown is foreign investment.


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Bring back indexation to replace big CGT discount


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