This report examines the role of these tax settings within the broader housing system, noting that housing is one of the most heavily taxed items in the economy and arguing that housing outcomes are shaped by tax settings, among other factors. 

Housing investment plays a central role in Australia’s dwelling supply pipeline, particularly for rental housing and higher-density development. In the past year, investors accounted for over 40 per cent of all loans for the construction or purchase of new dwellings, underscoring their importance to housing delivery. Investors provide a larger share of capital required to finance new apartment construction due to the longer lead times. Any policy change that materially alters investor incentives therefore has implications not only for asset allocation, but for the volume, timing and composition of new housing supply.

Claims that changes to capital gains tax arrangements introduced in 1999, or the ongoing availability of negative gearing, are a primary cause of rising house prices are misguided. They rely heavily on timing correlations rather than causal evidence. Over the past two decades, real house prices have increased faster than incomes across most advanced economies, including in jurisdictions with very different housing tax systems. This indicates that broader structural factors, such as constrained housing supply, population growth and declining global interest rates are the dominant drivers of price growth, rather than any single domestic tax change.

The report also finds that international comparisons are frequently misapplied in the housing tax debate. While Australia’s negative gearing arrangements are often portrayed as unique, the deductibility of costs incurred in earning rental income is a standard feature of income tax systems internationally. Differences across countries typically arise not from whether deductions are allowed, but from how housing is taxed as a whole. Many jurisdictions that limit investor deductions impose capital gains tax on owner-occupied housing, allow mortgage interest deductibility for owner-occupiers, or rely more heavily on recurrent property taxes. Selectively adopting individual elements of overseas tax systems without their broader context risks undermining the balance between simplicity, equity and efficiency, and can weaken incentives for housing investment.

Economic modelling and historical experience consistently indicate that increasing taxes on housing investors reduces investment in new housing, particularly in supply-constrained markets. While the short-term effects of such changes may vary across regions and market segments, the longer-term consequences include less dwelling construction, reduced rental supply and upward pressure on rents. These effects are most pronounced where alternative sources of housing finance are limited and where planning and infrastructure constraints already restrict supply responsiveness.

Proposed policy changes also suggest that increasing taxes on housing investors in the established market would lead to increased investment in new housing supply. For this to be correct, new housing supply must also be a ‘Giffen good’, where demand for an item rises, as the cost of it increases. Taxing investment in established homes will cause a decline in investment in new homes, just as taxing the disposal of used cars would adversely impact the sale of new cars. Investors can see through the timeframe of an investment and estimate the lifetime costs and returns from an investment in any category.

Addressing the challenge also requires increasing investment in housing from owner occupiers, investors and government. This can only be achieved through lowering the cost of delivering and financing completed homes. Improving housing affordability requires policies that support a sustained expansion in housing supply. This includes efficient planning systems, timely land release, coordinated infrastructure provision and stable taxation and financing settings that encourage long-term investment. 

Governments need to first fix housing supply, not seek to increase tax imposts on housing supply.

For more information please contact: