Australia’s housing crisis is being misdiagnosed as a tax and distribution problem rather than a fundamental shortage of homes, according to Housing Industry Association chief economist Tim Reardon (pictured).
Responding to an Australian Financial Review article, “Wind back capital gains tax break, Labor told”, Reardon argued that proposals to curb the capital gains tax (CGT) discount on investors would do little to improve affordability – and risk making the supply shortfall worse.
“The article treats housing inequality as a distributional problem that can be corrected through tax rebalancing between investors and first home buyers,” he said in an HIA commentary. “This framing is appealing. It is also wrong.”
“Australia’s housing problem is not primarily about who owns homes. It is about how many homes exist relative to how many households need somewhere to live.”
Reardon said demand for housing was driven by population growth and household formation, not whether homes were owned by investors or owner‑occupiers.
“Focusing on investor participation while ignoring the underlying supply-demand imbalance confuses symptoms with causes,” he said.
HIA has described Australia’s housing market as being “increasingly defined by a structural imbalance between strong underlying demand and persistently weak supply”, with housing “one of the most heavily taxed items in the economy” and outcomes shaped by tax, planning, land supply and infrastructure charges.
NSW Treasury has pointed to the growth in investor lending relative to first‑home buyer lending over the past 30 years as evidence that tax settings are distorting the market.
But Reardon said this view ignored broader structural factors, including stronger population growth, higher migration, later household formation, tighter macroprudential rules and planning systems that “consistently failed to deliver sufficient housing”.
“In an undersupplied market, capital flows toward assets protected by scarcity. Investors are not creating demand for housing; they are responding to it. Penalising them does not make the demand disappear,” he said. “Instead, it increases the cost of supplying homes to meet that demand and leads to fewer new homes delivered to market.”
Reardon argued that reducing the CGT discount might raise revenue but would “reduce the supply of homes because it does so by increasing the required return on housing investment”.
In a market where supply is already constrained, “higher required returns mean fewer projects proceed, not more. Rents rise, construction falls, and the very households the reform claims to help face higher costs and fewer options.”
He also argues that “claims that changes to capital gains tax arrangements introduced in 1999, or the ongoing availability of negative gearing, are a primary cause of rising house prices are misguided,” pointing instead to constrained supply, population growth and global interest rate trends as the dominant drivers.
The HIA economist also rejected arguments that capital should be pushed out of housing into “more productive” investments, saying governments had made housing scarce through financing restrictions, planning, infrastructure pricing and regulatory delays.
“Housing is low risk not because of tax concessions but because policy settings guarantee scarcity. Taxing investors for responding rationally to that environment does not improve productivity, it entrenches the underlying failure,” Reardon said, noting the Henry Tax Review had cautioned against increasing taxes on housing for this reason.
He said Australia now has “more desired households than existing homes” and that shifting tax burdens within the system “does not reduce inequality. It redistributes it, often onto renters and younger households.”
“The way to re-balance the problem in the real estate market is to increase the supply of homes, slowing rental price growth, until investors are forced to compete to attract tenants,” Reardon said.
“Housing is heavily taxed, and that is a significant cause of the undersupply of housing. Increasing the taxes on housing will only make the problem worse. Governments cannot make housing more affordable by taxing it more.”
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
