The Federal Government is exploring changes to capital gains tax concessions as part of efforts to make housing more affordable. While much of the debate has focused on home prices and buyer incentives, one key group is being overlooked: renters.

A Senate select committee is currently conducting inquiries into the issue and is due to report on CGT feedback in March[i], but Angus Raine, Executive Chairman of Raine & Horne, warns that if the changes are framed as a way to help more young Australians into the housing market, the move risks being tone-deaf to the needs of younger Australians.

“Mum-and-dad investors are critical to the supply of rental housing for younger Australians, and if the CGT discount is scrapped, we run the risk of widespread forced sales,” Angus said.

“With many mum-and-dad investors owning rentals in entry-level price ranges, these properties are typically snapped up by first-home buyers. This means they’re immediately lost to the rental pool, and it can currently take five to ten years to bridge that shortfall. If the CGT discount is scrapped, that lag could be even longer.”

When demand outstrips rental supply, prices will rise substantially

Angus continued, “You don’t need to be an economist to know that when demand outstrips supply, prices rise.

“This scenario will play out in rental markets across the country, and tenants currently trying to put aside money for a first-home deposit will be squeezed even further by substantial rent prices that will eventuate from a change in the way investment properties are taxed.”

Just this week, Raine & Horne Gosford and East Gosford, located on the NSW Central Coast, reported zero vacancies in mid-February for the first time in around six decades.

This scenario of extremely tight supply and rising rents is already playing out in markets like this across Australia, and it will only intensify if the Federal Government takes the axe to the capital gains tax discount, Angus noted.

“We already know that when governments make it tougher for investors, many simply walk away and shift their money elsewhere, and away from bricks and mortar, an asset class far more familiar to Australians than shares, bonds or crypto.”

Rental caps biting as landlords walk away from ACT properties

In the ACT, for example, rent caps that limit increases for existing tenants have seen about one in five landlords with properties in the nation’s capital exit the market, according to Raine & Horne principals servicing the region. At its core, the ACT rent cap limits how much rent can be increased during an ongoing tenancy.

Specifically, ACT landlords may only increase rent once every 12 months, and the increase must not exceed the ACT rental component of the Consumer Price Index (CPI) plus 10%. This figure is published quarterly by the Australian Bureau of Statistics.

For example, if your current rent is $500 and the Canberra Rental CPI has increased by 2% since your latest rent increase (or the start of the tenancy agreement if the rent has not been increased), then the rent can be increased by 2.2% (or $11) from $500 to $511[ii].

Tax relief needed for older investors ready and willing to sell up

If the government is resolved to push investors to sell and run the risk of creating further friction across rental markets, Angus believes it should at least work with landlords who are already willing – and wanting – to benefit from their investments.

“Rather than hurting hardworking mum-and-dad investors by making it harder for them to hold an investment property, I’d urge the Federal Government to make it easier for those ready to transition into retirement to sell their real estate assets,” Angus said.

“Property held by older investors is also contributing to supply constraints in capital cities, with many holding on because they need to account for CGT when they sell,” he added.

According to Angus, housing supply could be unlocked by introducing a means-tested sunset clause on the payment of CGT obligations for the sale of investment properties owned by older Australians.

“One option to help break the supply impasse is to provide property investors over 60 with a temporary exemption, say, 24 months, on the payment of CGT liabilities,” Angus explained.

“This would help flush out older investors who are ready and more than willing to sell and move into the next phase of life, bringing those tightly held investment properties to market sooner to help address supply challenges.”

If you’re considering listing a property before Easter, contact your local Raine & Horne agent today.

[i]https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Operation_of_the_Capital_Gains_Tax_Discount/CapitalGainsTaxDiscount

[ii] https://www.act.gov.au/housing-planning-and-property/renting/rent-increases#Rent-increase-calculator