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{{propApi.successMessage}} {{region}} Change locationHousing inequality is not a tax problem, it is a numbers problem
Housing inequality is not a tax problem, it is a numbers problem
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The article treats housing inequality as a distributional problem that can be corrected through tax rebalancing between investors and first home buyers. NSW Treasury’s submission goes further, suggesting that curtailing the capital gains tax discount would “rebalance incentives” and improve affordability.
This framing is appealing. It is also wrong.
Australia’s housing problem is not primarily about who owns homes. It is about how many homes exist relative to how many households need somewhere to live.
Demand for housing is created by population growth and household formation, not by tenure. Whether a dwelling is owned by an investor or an owner occupier does not change the number of people who need shelter. Focusing on investor participation while ignoring the underlying supply-demand imbalance confuses symptoms with causes.
NSW Treasury points to the growth in investor lending relative to first home buyer lending over the past 30 years as evidence that tax settings are distorting the market. But faster growth in investor lending tells us very little about causation. Over that same period Australia has experienced stronger population growth, higher migration, later household formation, tighter macroprudential lending rules for first home buyers and planning systems that have consistently failed to deliver sufficient housing.
In an undersupplied market, capital flows toward assets protected by scarcity. Investors are not creating demand for housing; they are responding to it. Penalising them does not make the demand disappear. Instead, it increases the cost of supplying homes to meet that demand and leads to fewer new homes delivered to market.
The article also claims that the capital gains tax discount represents a “material injection of demand”, equivalent to around 1 per cent of annual dwelling transaction values. This misunderstands how housing markets work. Prices are set at the margin, not by aggregate transaction values. Permanent tax changes are capitalised into prices rather than absorbed annually. That is why even advocates of CGT reform concede the impact on prices would be negligible, less than 1 per cent.
If prices barely move, affordability does not meaningfully improve. What does change is the risk profile of new housing investment.
Reducing the CGT discount may raise revenue, but it also reduces the supply of homes because it does so by increasing the required return on housing investment. In a market where supply is already constrained, higher required returns mean fewer projects proceed, not more. Rents rise, construction falls, and the very households the reform claims to help face higher costs and fewer options.
The argument that capital should be pushed out of housing and into “more productive” investments is equally flawed. Capital flows to housing because governments have made housing scarce through financing restrictions, planning, infrastructure pricing and regulatory delays. Housing is low risk not because of tax concessions but because policy settings guarantee scarcity. Taxing investors for responding rationally to that environment does not improve productivity, it entrenches the underlying failure.
This is precisely why the Henry Tax Review cautioned against increasing taxes on housing, lest they exacerbate those very supply constraints. Since that warning was issued, the shortage has become more acute, not less.
Australia now has more desired households than existing homes, and that gap is projected to widen for years. In that context, rebalancing tax burdens within the housing system does not reduce inequality. It redistributes it, often onto renters and younger households.
If governments are serious about affordability, the focus must shift away from tenure and toward volume. That means fixing land supply, planning systems, infrastructure funding and tax layering on new construction. Until enough homes are built to meet population-driven demand, no amount of tax tinkering will make housing fair or affordable.
Treating a shortage as a fairness problem may be politically convenient. It does not make it economically sound.
The way to re-balance the problem in the real estate market is to increase the supply of homes, slowing rental price growth, until investors are forced to compete to attract tenants. At this point, capital price growth will slow and investors will leave the housing market in an orderly fashion for other sectors.
Housing is heavily taxed, and that is a significant cause of the undersupply of housing. Increasing the taxes on housing will only make the problem worse. Governments cannot make housing more affordable by taxing it more.
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Housing inequality is not a tax problem, it is a numbers problem
The Australian Financial Review article (13 January 2026) “Wind back capital gains tax break, Labor told” rests on a fundamental misdiagnosis of Australia’s housing challenge.
Taxation of housing and its impact on supply
Australia’s housing market is increasingly defined by a structural imbalance between strong underlying demand and persistently weak supply. While much of the policy focus has rightly centred on planning systems, land supply, infrastructure charging, and construction costs, taxation settings affecting housing investment have become a growing focus of public debate. Negative gearing and capital gains tax discount are frequently cited as primary drivers of housing affordability pressures.
A shortfall of 2 million homes
Australia’s housing affordability crisis is set to get even worse. This means the ‘catch up’ required will get even bigger.
Costs contained
There’s some good news that has flown under the radar in recent months with all the talk of inflation, interest rates and international developments around tariffs, trade wars and actual wars – and that is building costs.