Capital gains tax and negative gearing: First home buyers and investors have their say on government reforms

Negative gearing and the capital gains tax are two terms most Australians will no doubt have heard plenty about in the last few months.

Labor used the May 12 budget to pull back the curtain on a contentious plan to wind back the tax concessions.

After breaking an election promise, the changes were trumpeted as a way of levelling the playing field between investors and first home buyers looking to get a foot on the property ladder.

“The old intersection between the tax system and the housing market helped make housing unaffordable and coincided with decades of low productivity growth,” Treasurer Jim Chalmers said after legislation passed parliament on June 25.

“We are taking action because doing nothing would have consigned another generation to that broken status quo and locked them out of the housing market.”

The reforms have already faced an early pressure test after Australian house prices recorded their biggest month-on-month fall in years, sparking debate about whether the changes had devastated investor confidence and would leave recent buyers with a property “worth less than what they bought them for”.

“You have actually managed to crash the housing market,” federal opposition attorney-general Michaelia Cash told Labor on Sunrise.

What is the capital gains tax and how is it changing?

CGT is the tax you pay on profit made when you offload assets including property and shares.

Under the reform, the flat 50 per cent CGT discount for individuals, trusts and partnerships is being replaced with cost base indexation and a 30 per cent minimum tax rate on capital gains.

What is negative gearing and how is it changing?

Negative gearing refers to the situation where the cost associated with an asset is more than the income earned on it.

For example, a property is negatively geared when rental income is less than the amount needed to cover interest repayments on the mortgage, rates and maintenance for the dwelling, allowing investors to claim a tax deduction.

“The Bill reforms future negative gearing so that it only applies to new builds from 1 July 2027, with generous grandfathering provisions for anyone who currently owns an investment property,” Chalmers said.

“This is all about encouraging investment in new housing supply while also respecting previous investment decisions people have made.”

Are first home buyers better off?

7NEWS.com.au asked what first homebuyers made of the reforms and, most importantly, if it had or would help them secure a property.

“My partner and I are looking to buy in the next 12 months. Seeing prices stabilise is good for us,” one person responded to the social media callout.

“The rate things were going, we’d be up for another $50-100k on current prices.”

Another said “It will [help]”.

“Properties I’m interested in haven’t been nabbed up by investors and prices have dropped to a reasonable amount,” they said.

‘Not a light switch’

Mortgage brokerage Loan Market told 7NEWS.com.au that loan lodgements for first home buyers across Australia were 11 per cent lower in the four weeks after the federal budget than the month leading into it.

But it said it was worth noting that applications had generally been trending down this year, a period when the RBA had hiked rates three times.

“Prices may have dropped slightly but borrowing power has been nuked with rate rises and isn’t allowing you to take advantage of the price drop,” one person responding to our callout said.

“Once rates drop, prices rise and you’ll be in the same position.”

Others said it was simply far too early to tell what the final shakeout will look like.

“It’s not like a light switch,” said one commenter.

“It won’t happen immediately, primarily due to the grandfathering clause. The next year will probably see mixed data before hopefully settling down.”

Mud-throwing madness

Australia Institute senior economist Matt Grudnoff said there were two ways to look at the government overhaul.

“If you think that housing is about a safe and secure place to live, this is good news. If you think housing as an investment, a way to build financial security and become rich, then this is bad,” he told the institute’s Dollars and Sense podcast.

“There has been a lot of mud thrown around over the last few weeks since the budget that have confused people and made people worry that perhaps young people for example won’t be better off, which is just madness.

“This is the first time that I am optimistic that we’re going to actually solve this (housing affordability) problem.”

Grudnoff told 7NEWS.com.au a 25-year “housing super cycle” was set off by the introduction of the 50 per cent capital gains tax discount.

“Along with negative gearing, it encouraged investors to rush into the market, push up house prices and lock out first home buyers,” he said.

“Over the last six years the average house has increased in price by $400,000. That’s almost $70,000 a year.

“These changes will stop the rapid growth in house prices, giving hope to first home buyers.”

What investors say about the tax reforms

Entrepreneur and property investor Dr Vivek Eranki said the changes increase the tax burden on people willing to invest and take on financial risk.

“Housing supply is Australia’s biggest challenge. I do not think increasing taxes on private investors addresses the underlying shortage of homes,” Eranki told 7NEWS.com.au.

“Private investors provide a substantial proportion of Australia’s rental housing. If investment becomes less attractive, fewer people will be willing to supply rental accommodation.”

His comments come as it was revealed the national median rental price had climbed 5.9 per cent in the year to June, to a record $705 a week.

“The primary driver for ongoing rental growth remains a severe lack of available stock across the country,” Cotality said, with the national dwelling vacancy rate at 1.6 per cent.

Investors ‘could turn away’ from property

The reforms have been slammed by some as a tax that will punish ambition.

Financial adviser Alex Jamieson, founder of Jamieson Private Wealth, said investors could turn away from property in favour of shares, ETFs and other low maintenance assets.

“Property investing has traditionally been seen as the golden path to wealth in Australia, but the equation is changing rapidly,” Jamieson said.

He said property is “often sold as passive income” but is far from that in practice when you consider maintenance, insurance, council rates, rising interest rates and the possibility of difficult tenants.

“Anyone who owns investment properties knows it can become a second job and carries a lot of stress,” Jamieson said.

Are the changes to blame for stalling auction rates and national house prices?

Dwelling values nationally fell 0.4 per cent in June and banking giant HSBC forecasts prices could decline up to 8 per cent by the end of 2027.

RMIT school of property, construction and project management’s Callum Logan said recent changes to investor taxes were just one element of the melting pot currently shaping buyer confidence, with interest rates rises, uncertainty over further hikes, higher living costs, and war in the Middle East also contributing.

“Australian capital cities are frequently awarded as overachievers for the most unaffordable property markets. Try as we might, we are also not good at solving the issue by building more supply,” Logan said.

“Option B, which is to tinker with demand, is what we are seeing right now. This is reflected in changes to investor tax settings.

“Lower-priced properties with the best investment yields often attract both first home buyers and investors, creating direct competition as the same auctions. The new investor tax settings will go some way to redirect investors toward new housing.

“Clearance rates were already heading south before the tax changes were announced, so the main uncertainly may still rest with the direction of interest rates.”