Here are the arguments put forward to justify changes to negative gearing and capital gains tax on housing.

Supply decline

The supply of homes has deteriorated since changes made in 2001, when Peter Costello introduced the ‘discount rate’.

This argument is effectively ‘after it, therefore because of it’.

The GST was introduced in 2000, and is applied to new homes, not to established homes. It would equally be valid to claim that the GST caused the decline in new home supply. The rapid increase in home prices compared to incomes occurred after the GST was introduced. 

The problem with this logic is that the same house price growth cycle is present in almost all developed economies from the same time. The Australian government tax changes did not impact on home supply in Canada, New Zealand, the UK, or the US. The changes that were made to capital gains tax (CGT) in 2001, or the introduction of the GST, did not impact on home prices outside of Australia.

Even if the changes in 2001 were the cause of the problem, reverting to the pre-2001 policy would appear to be the better solution than doubling down on taxes on housing.

Lack of investors

Investors are not building new homes. This was the error of assessment made by the ALP during the 2019 election campaign and resulted in a significant change when the Australian Bureau of Statistics (ABS) made it clear that this was incorrect. The benefit of this policy mistake is that since 2019, the ABS has collected and is now publishing data on the number of homes investors are buying and building.

In the 2025 financial year, around 40% of new homes built were by investors. This is a higher share than anticipated and reflects two things: that investor participation in the new home market is relatively stable, and higher interest rates have a larger adverse impact on owner-occupiers than more solvent investors.

Secondly, investors are more astute and can identify that the growth in demand for homes from migration alone will exceed the ability of the industry to supply homes in the face of tax and regulatory increases, and prices will rise.

The ABS has only collected data on investor activity since the 2019 error and confirms that around a third of new homes are built by investors, a third of established homes are purchased by investors and therefore, investors own around a third of homes in Australia with the other two-thirds owner occupied.

Encourage investors

Encourage investors to build new, by taxing investors that buy established homes. 

This logic, which is frequently presented by Senator David Pocock and the Greens, states that if we tax investors more for buying an established home, it will reduce demand for established homes and encourage more investment in new home building.

This argument has simplistic appeal as the impact of investors bidding at auction is obvious, and investors are always more solvent buyers than first home buyers. The problem with this argument is that it may ease home price pressures in the first instance, but when the second order effect kicks in, the underling supply and demand imbalance will be magnified and the short-term price easing will be more than offset.

The first order effect of taxing investors more if they borrow to purchase an existing home would see them exit the existing market. The day after the policy comes into effect, price growth will ease as some investors leave the market leaving fewer bidders at weekend auctions are no longer bidding.

Unfortunately, this is where most politicians consider ‘mission accomplished’ and they do not consider the second order effects. In practice, only some investors exit the market, just those that were dependent on negative gearing to make their investment viable. The more solvent investors who are less reliant on structuring positive cashflow would remain in the market and compete with first home buyers.

In an undersupplied market, such as all cities in Australia, owner-occupiers will always have to outbid an investor. Furthermore, highly leveraged investors are probably less solvent than investors who rely less on negative gearing, meaning the investors that remain in the market are the wealthier ones who’ll continue to outbid first home buyers.

Increasing the taxes on investors does not lead to cheaper established homes but does lead to higher rents as investors incur higher costs. In a market with constrained supply and elevated demand, these costs are passed through to renters.

The logic that because investors account for around a third of all established home purchases, by removing them, there will be more homes available for first home buyers and owner-occupiers is deeply flawed. There are circumstances where this could be true, but only briefly. 

The problem is that Australia has more households than homes. This problem is expected to get worse every year for at least the next five years. Investors don’t live in their investment houses; the homes they own are available to rent. So if every rental home in Australia was to be purchased by a first home buyer, the problem remains the same. 

Within one election cycle, first home buyers will find that they’re competing for a finite number of homes, which is not sufficient to meet the growth in demand created by the formation of new households.

The additional argument that investors will simply shift from buying established homes to building new is also wrong. This ignores two things. 

Firstly, new housing becomes established housing. Just like if the government were to impose a tax on used cars, this would not lead to an increase in the sales of new cars, because buyers would be aware that they would one day sell their new car, and it would incur a penalty to the value of the tax on used cars. So too, investors are aware that taxing established homes will lead to a penalty on sale of their new home, and factor this into their decisions. 

Even if such a reform did manage to seamlessly redirect demand from existing to new homes, with no drop in the number of investors, the inelastic supply of new housing would push up prices. Given the close feedback loop of price signals in new and existing properties, price pressures would remain throughout the broader housing market.

In effect, taxing established homes more than new homes leads to the same outcome: fewer new homes commencing construction and an additional deterioration in the supply of homes will emerge. This unfortunately rewards those investors that were present in the market at the time the new tax was introduced, further worsening the equity concerns.

Finally, demand for homes is only increased by an increase in population, or a reduction in the number of people per home. This fact has been repeated by the Reserve Bank and other government agencies that are able to see the challenge beyond one election cycle.

Looking five years ahead

HIA was founded on a principle of encouraging home ownership. It leads to numerous positive economic and societal benefits. But to do this, we first need to build enough homes to meet demand.

HIA has also maintained that migration should be ‘stable and reliable’ not the roller-coast of the past five years. To this end, the government has failed to deliver a balance between growth in demand and supply of homes.

If over the five years to 2030, Australia builds an additional 800,000 homes (net of demolitions) and demand for homes grows by one million new households (population to reach 30 million), then the impact on the price of established homes is that they will increase rapidly, regardless of tax rates on investors. This is a realistic scenario for Australia and one consistent with the outcomes of the National Housing Supply and Affordability Council noted that each year for at least the next five years, Australia will see more households form than homes constructed. 

This is why the Henry Tax Review recommended against increasing tax revenue from negative gearing or capital gains tax, until the shortage of supply is resolved. Since 2014, when the Henry Tax review was completed, the problem has gotten worse. Governments have continued to use new home building as a source of revenue, and regulatory impost’s have increased further restricting the supply of homes.

The goal should be to increase the supply of homes, by reducing taxes and imposts, so that prices and rents cease their rapid increase and investors will exit the housing market for other industry sectors with better returns.

For more housing industry insights, visit HIA Economics.

First published on 8 September 2025