Housing Tax Reform without much Housing Reform

The Setup

The Albanese government is set to announce changes to negative gearing and the capital gains tax discount in the May 12 budget. It will be framed as a landmark moment for housing affordability and intergenerational equity. It is neither. It is a modest tax adjustment to second-order mechanisms in a system whose first-order problems are not being touched.

Here is what the policy is, why it matters at the margin, and why it does little to fix housing purchase affordability and may even harm rental affordability.

What the current tax settings actually do

Negative gearing allows investors to deduct rental property losses against wage income. The CGT discount allows investors to pay tax on only half their capital gain on assets held more than twelve months. Both concessions apply broadly across asset classes – they are not property-specific in the tax law.

The problem is not the concessions themselves, which have reasonable theoretical justifications. The CGT discount addresses the genuine issue of taxing inflationary gains as real income – though the current flat 50% is a crude proxy for what proper cost-base indexation would deliver, and was introduced in 1999 as an administrative simplification rather than a principled inflation correction. Notably your savings account receives no equivalent inflation adjustment on interest income.

Negative gearing reflects the sound tax principle that losses should be deductible against income regardless of source. A business that runs at a loss in early years offsets that loss against other income. The same principle applied to investment property is internally consistent.

The real problem is the interaction between these concessions and the banking system's unique willingness to lend 80-90% against residential property at low rates and high volumes. That leverage availability is not replicated at comparable scale, cost, or stability for shares, business investment, or productive infrastructure. Margin lending exists for shares, but it comes with mark-to-market margin calls – the lender can force a sale into a falling market at the worst possible moment. A residential mortgage has no equivalent mechanism. There is no margin call. The borrower holds through any downturn as long as they service the debt, with the downside bounded by cash flow rather than market price movements. Cheap abundant debt with structurally bounded downside transforms theoretically neutral tax principles into an extraordinarily powerful wealth accumulation mechanism – one available through residential property in a way that simply cannot be replicated elsewhere.

The engine of the distortion is artificial scarcity maintained by planning systems – the dominant constraint on supply, though not the only one, with construction capacity, labour shortages and infrastructure provision also binding at the margin. Banks lend aggressively against residential property because it appreciates reliably. It appreciates reliably because supply cannot respond to demand. Supply cannot respond because zoning and approval systems give existing owners an effective veto in practice over new construction. As I argued in an earlier post, this is not an immigration story – it is a planning story. Decades of visible, foreseeable demand have simply exposed a supply system that was never allowed to function.

The tax concessions amplify the returns from that artificial scarcity. They are not the cause of it.

What the government could plausibly announce

What follows is inference from the Senate inquiry findings, Treasury modelling, and political positioning – not confirmed policy. As of writing, Cabinet has not finalised decisions and the budget is still five weeks away. But the shape of the package is sufficiently clear from public signals to sketch one plausible version of the landing point.

The CGT discount could be reduced from 50% to somewhere between 25% and 33% for investment properties, applying to purchases after budget night with existing holdings fully grandfathered. A carve-out could maintain a higher discount for newly constructed dwellings to avoid simultaneously killing the development pipeline. Negative gearing could be capped at two investment properties per person held in personal name, also grandfathered for existing holdings. Vacant property deductions could be disallowed. Some form of consultation commitment on trust and company structures may be included, with actual legislative change deferred.

Accompanying supply measures – an expanded Housing Australia Future Fund, some build-to-rent incentives, announcements framed as planning reform partnerships with states – will provide the balanced package narrative. They will be modest relative to the scale of the problem.

What I expect would not be announced: 

• Full abolition of either concession – because grandfathering is necessary to reduce opposition from existing landlords, and complete abolition would provide too great a disincentive for rental investment.
• Retrospective application – because it would be legally and politically indefensible. 
• Any serious demand-side management through immigration settings – because that debate is totemic and touches a core Labor constituency. 
• Meaningful federal intervention in state zoning – because the Commonwealth has no direct constitutional levers over planning law, and the states that do have those levers are themselves captured by the same owner-occupier constituency blocking change – and are fiscally addicted to stamp duty revenue from high transaction prices, giving them a direct financial incentive to maintain the conditions that keep prices high. 
• Comprehensive reform of trust and company structures – because closing them properly means taking on small business owners, self-employed professionals, and the accounting and financial planning industries whose entire practice is built around those structures, a constituency with considerably more political firepower than mum and dad property investors.

The boundaries of the package are not accidental. They are precisely drawn around what can be done without disturbing the interests that matter most to the government's political survival.

Why this does little to fix housing

The grandfathering is the tell. The entire existing stock of investment properties is unaffected. The two-property cap means the majority of individual investors are unaffected. The trust and company loopholes – through which sophisticated investors hold property – remain substantially intact. The wealthy investor operating through leveraged corporate structures and debt recycling strategies is largely untouched by changes to personal name concessions. The mum and dad investor with one property in their own name likely bears a disproportionate share of the cost of a reform ostensibly aimed at wealthy accumulation.

Even setting aside who bears the burden, the policy leaves untouched every mechanism that actually drives the problem. The supply blockage stays. The planning system stays. The effective council veto stays. The banking system's willingness to lend against scarce residential land stays. The collateral circularity – rising values enabling further borrowing enabling further purchases – stays. The low density urban form that makes transit unviable and infrastructure expensive stays.

You are slightly detuning the amplifier while leaving the engine running and the fuel supply intact.

On rents the news is worse. Private investors – including mum and dad landlords – are the primary providers of rental housing in Australia because of a historical accident that hardened into structural dependency. Post-war Europe built large-scale public housing because it had to – bombed-out cities required state-led reconstruction at scale, and the institutional and fiscal apparatus built for that task persisted as the foundation of social housing systems that endure today. Australia emerged from the war with its cities intact. The modest public housing programs of the late 1940s and 1950s were never stress-tested by physical destruction, never required to operate at European scale, and gradually atrophied as private ownership – subsidised by rising land values and eventually by tax concessions – became the dominant model for both occupation and investment. The consequence is a rental market overwhelmingly dependent on private investors whose participation is sensitive to after-tax returns. Reduce those returns without providing replacement supply and the stock of rental dwellings grows more slowly than it otherwise would. In a market with near-record low vacancy rates and sustained immigration-driven demand, the direction of rent pressure is clear. The people most immediately hurt by this reform are the renters it is ostensibly designed to help.

AHURI contests this, arguing that investors mostly buy existing dwellings that would otherwise become owner-occupied, so removing them doesn't reduce rental stock – it just transfers ownership. That argument has theoretical merit in a normal market. It breaks down when large numbers of potential owner-occupiers cannot buy regardless of investor activity – because at current prices and current mortgage serviceability requirements, the transfer doesn't happen. The renter stays a renter in a market with one fewer rental property. And with immigration running at record levels, new renters are entering that market continuously, with no near-term path to ownership regardless of what investors do.

What would actually fix housing

I covered the supply argument in detail last month, but it bears restating in this context.

The fundamental problem is that Australian cities are built at densities too low to house their populations affordably or to make mass transit financially viable. The two problems are the same problem. Medium density development within walkable catchments of rail corridors would simultaneously increase housing supply, make transit patronage viable, reduce per-household infrastructure maintenance costs, and lower household carbon emissions. These are not separate policy challenges – they share a single solution.

Tokyo is the proof of concept. A metropolitan area of 35 million people with housing costs that have been roughly stable in real terms for thirty years – not because demand is low but because national zoning law permits supply to respond. Auckland provides the sharper recent test: following genuine upzoning reform in 2016 and 2021, rents and prices softened relative to the rest of New Zealand. Same immigration settings. Different planning rules. Different outcome.

The variable that differs between these cities and Sydney is not demand. It is whether local governments can block construction.

Genuine supply liberation in Australian cities would require state governments to override local zoning in designated corridors, remove third party objection rights for complying developments, mandate as-of-right medium density within walkable distance of train stations, and strip councils of discretionary planning powers over housing form in high demand areas. Some states have begun tentative steps in this direction. Every attempt gets softened, delayed, and litigated by the time it reaches the ground.

The reason is straightforward. The people blocking densification are asset-rich, politically engaged, and have an enormous financial stake in maintaining the scarcity that underpins their wealth. They are not passive victims of a policy they don't understand. They are active participants in a system that works very well for them, prosecuting their interests through mechanisms that democratic planning systems make available to organised minorities.

A rapid and comprehensive supply liberation would also be a political and financial catastrophe. Australian household wealth is overwhelmingly concentrated in residential property. The banking system is collateralised against current valuations. A structural repricing of land toward its use value rather than its scarcity value would simultaneously destroy household balance sheets and threaten banking system stability. This is not just a political constraint – it is a financial one. The path dependency runs deep: decades of policy, lending, and investment decisions have been made on the basis of current valuations, and unwinding them rapidly would cause genuine harm to millions of ordinary Australians whose retirement security sits in their home. Gradualism is not simply the coward's option. It is the only option that doesn't trigger a balance sheet crisis on the way to a better equilibrium.

What is achievable is gradual supply improvement sustained over decades – enough to stop prices rising faster than incomes without causing a crash. That is a twenty to thirty year project requiring political consistency across multiple governments that Australian politics has never delivered on housing. It requires overriding deeply entrenched local interests repeatedly, producing no visible electoral benefit in any single cycle.

On immigration: rapid population growth adds to demand pressure in the short run, particularly from the urban-concentrated rental-heavy international student cohort. The volumetric debate is legitimate and overdue. But cutting immigration tomorrow would not fix the supply system. The next demand impulse – domestic household formation, internal migration, whatever it is – hits the same constrained supply and you're back to the same problem within a decade. You have bought time without using it. The planning system is broken regardless of how many people arrive.

The honest summary

There is a fairness argument for the May budget package – but only if trust and company structures are genuinely closed, which they almost certainly won't be. Without that, the reform creates a two-tier system where ordinary Australians investing in their own name face reduced concessions while sophisticated investors operating through structures face largely unchanged ones. That is not a fairness improvement. It is a fairness inversion.

The May budget will be presented as a landmark moment of housing reform. It is a revenue measure and an electoral repositioning exercise conducted in the language of housing affordability. The genuine reformers in the tent – Pocock, the Greens – are true believers. Labor's motivation is more tactical: revenue to replace the abandoned gas tax, progressive credentials to stem the bleed to Greens and teals, youth voter appeal, and Greens Senate support at a price that doesn't require touching anything that would actually fix the problem.

The system is not broken for home-owners. It is working exactly as the political economy demands. The people it works for have the power to keep it working for them. Meanwhile a generation of Australians who will never own property in the cities where they work waits for a planning reform that neither major party has the incentive to deliver.

The honest version of this budget policy announcement: we're cutting investor tax concessions to raise revenue, win back progressive voters, and satisfy the Greens. Everything else is packaging.