Increasing CGT could burden first home buyers.

While increasing Capital Gains Tax (CGT) on rental homes may benefit first home buyers at the outset, the Housing Industry Association (HIA) said that the gain will inevitably turn into losses as the rise of rental costs lead to higher home prices, pricing first home buyers out of the market.

Taking this into consideration, along with dropping home values and building activity, HIA’s Principal Economist Tim Reardon suggested that this is not the appropriate time in the housing cycle to increase CGT.

“We cannot tax our way out of the housing affordability problem. The solution is less tax on housing and less government distortions on the market, not more,” he said.

Through the Centre for International Economics (CIE), it was found that an increase in CGT could cut $1 billion from revenue to state Governments. It will also drive renting cost higher and, as mentioned, worsen the housing affordability challenge.

Moreover, it was acknowledged that an increase in the tax would generate a revenue gain for the Federal Government of $0.5bn a year. However, these returns would be dwarfed by stamp duty tax losses to the states in excess of $1bn per year.

Reardon is also not in favour of grandfathering existing investment properties out of the CGT changes because amplify issues in supply, as well as affordability.

 “Grandfathering reduces revenue from Stamp Duty to the States by reducing the number of homes built, and delays the inflow of additional CGT revenue to the Federal Government for decades.”

In the end, Reardon said that providing adequate supply will reduce problems in affordability.

“The RBA, Productivity Commission, Federal and State Treasurers have all identified the constraints on the supply of housing as an underlying cause of housing affordability challenge.”

“Addressing affordability requires coordinated effort by all tiers of government to allow the industry to respond with the type and location of housing required to satisfy the pent-up demand,” he concluded.