Economists say property tax shake-up could finally slow runaway house prices

Shares in some of Australia’s biggest banks fell sharply in the wake of Labor’s sweeping housing tax reforms, with economists hailing the measures as a potential turning point for Australia’s runaway property market.

Speaking at The Australia Institute’s post-budget Politics in the Pub event in Canberra, Chief Economist Greg Jericho and Senior Economist Matt Grudnoff described the government’s changes to negative gearing and the capital gains tax discount as among the most ambitious housing reforms in decades.

The Sydney Morning Herald reported investors wiped almost $30 billion off Commonwealth Bank’s market value on Wednesday, with shares dropping 10.4 per cent amid concerns over the budget’s housing reforms and weaker-than-expected quarterly earnings.

Matt Grudnoff said the market reaction reflected growing expectations that house price growth would slow significantly under the new tax settings.

“Who’s the biggest winner from a rapidly rising housing market? It’s actually not investors. It’s banks,” he said.

“Giant mortgages that take longer to pay off means bigger bank profits.”

“And financial analysts are definitely now thinking this is going to stop house prices rising.”

The senior economist pointed to commentary in the Australian Financial Review describing the reforms as “the end of a 30-year housing super cycle”.

“And I’m thinking, good,” he said.

He argued the reforms could fundamentally reshape Australia’s housing market over time by driving speculators out of the market and slowing the rate of house price growth.

“We might actually have some policies that will actually do something about housing affordability, and that by itself is worth celebrating,” Matt Grudnoff said.

“After years and years of promises about housing affordability policies and house prices continuing to race way ahead of incomes, clearly they were all failing.”

Greg Jericho said the changes represented a historic political shift after decades in which reforming negative gearing and capital gains tax concessions had been considered untouchable.

“The government had done a really good job of preparing the ground so that when this rather massive and ambitious thing happened, it didn’t actually feel big,” he said.

“It really changes, I think, what is politically possible.”

He also pointed out this year marked a major turning point in the national political debate, with public discussion on the budget moving away from deficits and surpluses and toward structural tax reform.

“It was the first budget really ever where the run up to it wasn’t about, ‘What’s the deficit going to be?’” Jericho said.

“It was actually about, ‘What are you going to be taxing? How are you going to change things? Raising more tax from the capital gains? Are you going to do anything on gas?’

“It was a completely different attitude. And in that regard, I think it was kind of ambitious and quite important.”

He said the housing measures would likely return Australia to conditions more similar to those that existed before the introduction of the capital gains tax discount in 1999.

“House prices did go up, it’s just that they’ll go up in line with household incomes like they should, and not two and a half, three times faster as they have been over the past 26 years,” he said.

They defended Treasurer Jim Chalmers’ decision to break previous election commitments not to change negative gearing arrangements.

“The brutal political reality is: broken promises are only a problem if the promise you broke is something that’s unpopular,” said Grudnoff, comparing the move to Labor’s earlier changes to the stage three tax cuts.

The government’s decision to impose a 30 per cent minimum tax rate on discretionary trusts also gained significant attention.

Greg Jericho described the trusts as a “black box” that allowed wealthy Australians to distribute income in ways that significantly reduced their tax burden.

“One in every four dollars of income comes through a trust,” Matt Grudnoff added.

“If you earn more than half a million dollars a year, about half of those people have trusts.”

But despite praising the government’s willingness to move on housing tax reforms, both economists strongly criticised the budget’s treatment of welfare recipients and people with disability.

“There was nothing for people on welfare benefits,” Matt Grudnoff said.

“Unemployed people are still way, way below the poverty line.

“Even America has a more generous unemployment benefits.”

The government’s projected $36 billion reduction in NDIS spending drew some of the sharpest criticism of the night.

“It’s incredibly brutal,” said Greg Jericho.

The changes will see $16 billion cut from the scheme in just one year by the end of the decade and overall, will remove access for around 160,000 people.

“If this budget had been delivered by Josh Frydenberg or Joe Hockey, progressives would quite rightly be calling it cruel,” he said.

“And just because it’s Jim Chalmers doing it, doesn’t make it any less cruel.”

He pointed to the government’s decision not to introduce a 25 per cent gas export tax – which the Australia Institute found would have delivered around $17 billion a year.

“We always say budgets are about choices. Well, this year, the government chose to not assist people with disabilities so that they could very much assist gas companies,” he said.