A Liberal change transformed landlord behaviour. Switching it back won’t fix the housing crisis

"2026-04-22T11:23:53+10:00">April 22, 2026 — 11:23am

I wish we could make one change to the tax system and solve all of our housing problems.

In all the responses and comments this week to my story that the government is leaning towards a return to the pre-1999 arrangement for capital gains tax, there was this one overriding theme – the housing market is cooked and someone has to do something.

We live in a country where the median house price is north of $1 million in four capital cities, where asking rents on places that should be condemned would get you a small château in France, where homes are so expensive they mean couples are giving up on having a family.

So the idea that a single reform to the 50 per cent capital gains tax (CGT) concession could turn this all around is attractive.

But it’s a long way from reality.

Paul Keating introduced the CGT in the mid-1980s at a time when wealthy Australians who earned money from the buying and selling of assets made off like bandits. These capital gains went virtually untaxed.

Keating brought in his tax as part of a broad reform that included deep cuts in personal tax (the top marginal rate was 60 per cent) and company tax.

His tax was predicated on an important concept. He wanted to tax the after-inflation gain made by an asset holder, ensuring a person wasn’t financially penalised simply because what they owned increased in value in line with inflation.

This was the system until 1999 when Peter Costello, in response to an inquiry into business taxation, suggested making the system simpler (and more generous) by giving all asset holders a 50 per cent discount.

Supporters of the change argued it would encourage Australians to sink money into the sharemarket. They were utterly wrong.

Property investment jumped sharply. And, more importantly, it changed landlords’ behaviour.

Before this point, a majority of landlords made a small return on their investment. They were positively geared. But the CGT change became a huge incentive for people to take on large loans with the aim of making a substantial – and lightly taxed – capital gain.

We became a nation of debt-loving, negative gearing landlords, at a substantial cost to the federal budget. The CGT concession is just one cost being borne by the budget and the community. Treasury estimates that in the 2022-23 financial year (the most recent available) the 1.2 million people who negatively geared their rental property claimed $11 billion in losses. That amounted to $3.9 billion in tax benefits that hit the budget bottom line.

More broadly, median house prices in our two largest markets, Sydney and Melbourne, have climbed by 575 per cent and 450 per cent respectively since the CGT change. Those prices have climbed much faster than wages, which has meant a steep increase in the size of average mortgages. The national average home loan is now $736,000, having climbed by 47 per cent in the past five years alone. Loans are now so large that banks have pushed out the average length of a mortgage from 25 years to 30 years with some offering even longer.

As economists with the e61 think tank Nicholas Garvin and Matt Nolan recently noted, this encouragement of debt had a flow-on effect to the entire property market.

“This most likely increases the price of assets like housing, and pushes households into a less diversified and more highly leveraged portfolio than they would choose in the absence of the tax advantage,” they argued.

According to the federal Treasury, the CGT concession will cost the budget $19 billion in forgone revenue this year. About 83 per cent of that $19 billion will accrue to the top 10 per cent of all income earners.

Now before you mount the barricades demanding tax justice in our time, a few points.

While landlords overwhelmingly buy existing homes (often competing against first-time buyers for a property), they do also build new housing. So, if you change the CGT be prepared for a drop – albeit small – in housing construction.

And we need as many homes as we can build.

The Grattan Institute has estimated it would reduce construction by about 10,000 homes over five years.

While Treasury estimates $19 billion in forgone revenue, take that with a grain of salt. Any time you change the tax system, especially when it affects the wealthiest people who can afford really smart accountants, there will be behavioural changes.

The housing sector, which has a pretty substantial vested interest in this entire issue, warns there will be serious consequences from any CGT change.

Research for the Housing Industry Association found that removing the discount, without grandfathering, would reduce home construction by 33,000 properties, end 3000 construction jobs and wipe $3 billion from GDP.

It went on to argue that the compounding effect would mean fewer rental homes and higher rents for tenants.

There’s a problem with this argument.

Even under the existing CGT arrangement, rents are already climbing sharply as tenants fight over a limited supply of properties. If the CGT concession is so important for the construction of new rental properties, it’s doing a terrible job.

One of the big warnings from the property sector is that landlords will vacate the rental market, selling off their properties.

But those homes don’t disappear from the property market. They’ll be bought by other investors or owner-occupiers.

Sadly, for those wanting a simple solution, this is all small beer.

Even if you accept the Housing Industry Association’s research, you’re talking about 33,000 fewer homes in a country that’s aiming to build 1.2 million over five years.

If you hope a tax change will make housing cheaper, you’ll be disappointed.

Grattan estimates a 1 per cent drop in house prices. That would mean, in Sydney for example, a $16,000 drop in the median house price.

That leaves the median at a still utterly unaffordable $1.59 million.

Tax is important, but it’s not central to our housing crisis. A lack of new homes, coupled with crazy planning regulations and interest rate settings, are by far more important.

This week, Housing Minister Clare O’Neil announced the federal government would sink $250 million into the ACT to help build the infrastructure necessary to support about 4900 new homes in the nation’s capital. More than 1700 of those homes will be only available to first time buyers.

Moving high-voltage power lines or putting in proper sewers and drainage is not as exciting as a political bunfight over a tax concession.

But that’s the hard grind necessary if we are ever going to address the Australian economy’s Achilles heel – its dependence on property.

Shane Wright is a senior economics correspondent.

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