Immigration is driving up house prices in Australia, right? Sorry, but you’re looking at the wrong people.
Yes, those moving to Australia add to demand for housing (after all, they need somewhere to stay).
But last financial year, nearly two-thirds of these people were on temporary visas and half were international students. They might push up rents, especially in the capital cities where they tend to move, but these migrants rarely look to buy a place when they arrive, and many leave once their visa expires.
We also know they contribute a lot when they’re here. Migrants do the jobs many of us don’t want to (from hospital and healthcare work to hospitality shifts) and contribute more in tax than they tend to benefit from government services, as well as filling skills shortages in areas such as construction: the very thing we need to build more houses.
Basically, yes, we can cut down our migrant intake. But it comes with a big price tag, from higher taxes to pay for things like caring for our ageing population to worker shortages.
And if we’re focusing on dampening house prices? There are much bigger fish to fry.
Fresh analysis by the Australian Council of Social Service shows it’s actually investors we should be pointing the finger at — and perhaps more crucially, the tax system that drives them to behave the way they do.
Property investors are buying twice as many homes as first home buyers, according to the research, with average loan sizes about $100,000 higher than those of first home buyers. It’s no wonder would-be first home owners are being outbid by investors and finding it so hard to walk away with the keys.
While investing in property can be a good thing if it means building more houses, the problem is that most property investments simply chew up existing housing. That is, the limited supply of housing in Australia is being bought up by investors at the expense of first home buyers.
If you believe migrants drive up demand, you should be just as outraged – if not more – about most investors. The Council of Social Service’s research suggests only one in eight investments in property are for building new homes.
That means, for the most part, investors — who are typically already wealthy — are buying up the limited housing we have, and generating income from it, while many renters are squeezed and end up struggling to save for a deposit to buy their first home.
Of course, investors aren’t necessarily heartless people. Most are acting, as is to be expected, in their own self-interest and trying to set themselves up for a more comfortable life within the rules we’ve set.
The problem is that the rules we’ve set give a leg-up to property investors — most of whom don’t need it — crushing many first home buyers in the process.
The wealthiest 10 per cent of households hold two-thirds of the value of investment properties in Australia, according to the council. And yet these investors benefit from tax breaks that help them keep buying – and often flipping – properties while taking on less risk, and making more gain.
The capital gains tax discount, for example, allows an investor to sell a property and only pay tax on half of the profit they make as long as they’ve held on to the property for at least one year (not hard to do when the value of your property is soaring).
That discount was introduced in 1999 as a simple way of only taxing the profit after inflation had been taken into account. Rather than calculating how much impact inflation had on every individual investment property sale over the years, the government decided it would be much simpler to just whack a 50 per cent discount on all of it.
That might have made sense back in the day. Today, with the calculation and data tools we have at our disposal, there is no excuse. We’re no longer in the Stone Age.
Negative gearing, similarly, encourages investors to buy more properties. That’s because – assuming they’re earning less in rent than they are spending on paying interest on the loan and other maintenance costs – they can reduce the amount of tax they pay by deducting the difference from their taxable income.
A person with a salary of $200,000, for example, who pays $30,000 in interest and rakes in $20,000 in rent, would be able to reduce their taxable income by $10,000 to $190,000 that year. Sure, they’re still making a loss — and perhaps they’re a rare breed of investor offering discounted rent — but they are effectively getting their interest payments subsidised, even if they then manage to sell that property for a huge profit.
Not only have these tax discounts pushed up demand for housing (unsurprising when you get such a sweet deal) with home prices rising three times faster than wages since the CGT discount began, but they are coming at the expense of affordable housing as well: not just lower house price growth but housing that is accessible to some of the most vulnerable people.
Of course, we can’t expect everyone to have flash housing.
But when the median rent is $15,000 higher than the “affordable” rent (an amount that does not exceed 30 per cent of income) for the lowest 40 per cent of income holders – and the national median home purchase price is more than half a million dollars higher than the “affordable” price (spending no more than 30 per cent of income on mortgage repayments over 30 years at an average 6 per cent interest rate) — there’s a clear problem.
There’s very little reason to fatten property investors’ wallets, especially when they’re not adding to housing supply. At the very least, the capital gains discount needs to be based on actual inflation figures.
We know the government’s social affordable housing comes at a cost to taxpayers. But so does homelessness and housing insecurity.
And guess who costs more than social housing recipients?
The Council of Social Service estimates that between 2019 and 2023, the federal government spent more on one property investor (just in capital gains tax discounts) than all levels of government spent on two people in social housing.
And affordable housing is something we can pay for by scaling back tax discounts for investors.
The council reckons curbing the CGT discount to 25 per cent and phasing out negative gearing would reduce home prices by up to 4 per cent (and by more in some places) – a similar impact to the government reaching its target of building 1.2 million new homes.
But I think keeping negative gearing or capital gains tax in place, especially for investment in new homes, makes some sense. Some people will always want to invest in property, but it makes sense for us to direct them towards investing in new homes (we all know the key to better housing affordability is increased supply as well as lower demand).
While immigrants seem to cop a disproportionate amount of blame (probably because they’re easy to spot), there’s a less visible group propelling demand for housing. Property investors can be a force for good, but not if what’s good for them is forcing first home buyers to stay locked out.
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Millie Muroi is the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect via X or email.
