Why Labor’s changes to negative gearing and capital gains tax won’t help young people get into housing market

Labor’s changes to negative gearing and capital gains tax concessions could end up making it harder to young people to ultimately buy the house they want to live in or boost the supply of housing needed during an affordability crisis, real estate experts say.

From July next year, negative gearing will be restricted to brand new properties and the 50 per cent capital gains tax discount scrapped.

While designed to level the housing market in favour of younger people, a leading property expert fears this change will deprive young people of the chance to buy houses in regional areas or more affordable suburbs to rent out, so they can eventually buy a house in a big city like Sydney, Brisbane or Perth to be an owner-occupier.

Under this strategy — known as “rent-vesting” — young renters buy a series of houses in affordable areas and later cash in on the capital gain to get a home in the city where their career and friends are.

Treasurer Jim Chalmers’ fifth Budget takes away that strategy of enabling investors to be able to handle a negative cash flow, with tax breaks, as part of longer-term investment plan.

“There was a lot of talk about intergenerational equity — I don’t know it quite met that,” Cotality’s head of research in Australia Gerard Burg told The Nightly.

“Purchasing a property in those early stages of a mortgage, you’re really looking at a negative cash flow so I think it does significantly reduce the likelihood that people are going to be able to do that as a strategy.”

The inability to claim rental losses for an existing property against an individual’s taxable income also makes it difficult for future young people to be able to build an investment portfolio to achieve their financial goals.

“It really makes a highly leveraged investment into property extremely unattractive,” Mr Burg said.

Weaker house price growth, as a result, also means developers lose the profit incentive, which in turn could potentially diminish the supply of new housing given the surge in construction costs.

This means builders would be less inclined to invest in a slow market like Melbourne and focus on a market like Brisbane and Perth, where house prices are going up by double digits.

“It’s less profitable to do so. The costs are really elevated. I think if you’re a builder right now, you’d be saying, ‘Please build my house in Brisbane rather than in Melbourne’,” he said.

With the changes grandfathered for existing investors who owned property before Budget night, shadow treasurer Tim Wilson said this would benefit boomers but hurt young rent-vestors.

“Under this bad faith Budget, young rent-vestors are on Jim Chalmers’ hit list because they’ll pay higher taxes when they’re losing money through the loss of negative gearing, and higher taxes if they sell through capital gains,” he told The Nightly.

“Meanwhile, boomers who have set themselves up will live in their tax-free primary residence and investment properties will be grandfathered.”

Dr Chalmers, who owns a Canberra apartment as an investment property, refuted the argument Labor’s tax changes would deprive young people of a chance to build wealthy through bricks and mortar.

“I wouldn’t agree that’s the conclusion. First of all, we are the party of aspiration,” he said.

He argued the 50 per cent capital gains tax discount that debuted in September 1999, under John Howard’s Coalition government, had distorted the housing market.

“The CGT arrangements were overcompensating people piling into the existing housing market and under compensating people investing in shares, or units or in other investment categories so we’re trying to fix that distortion but we’re trying to do it in a way that smooths out and minimises the market disruption,” the Treasurer said.

One Nation leader Pauline Hanson blamed immigration-fuelled population growth for making housing unaffordable, but said Labor’s Robin Hood changes only punished baby boomers who had invested.

“Mass migration has driven up the cost of housing, foreign investment has driven up the cost of housing,” she told reporters.

“All the Government is doing now is stripping that wealth and handing it to others — this is a Sheriff of Nottingham Budget.”