Would Changing Capital Gains Tax Concessions in Australia Really Improve Property Affordability?

Australia’s housing affordability crisis is one of the most politically charged economic issues of the 2020s. As prices in major cities have climbed far faster than incomes, policymakers and commentators keep returning to tax settings especially capital gains tax (CGT) concessions and negative gearing as levers that could cool the market and make homes more affordable. But would changing CGT concessions truly make a difference, or is it a case of tackling the wrong problem?

At the heart of the debate is the CGT discount: individual investors, trusts, and some superannuation funds currently pay tax on only 50% of capital gains on assets held for more than 12 months. In practice, this means a significantly lower effective tax rate on long-term investment profits than on ordinary income. Critics argue that this bias encourages speculative investment in property and tilts the system in favour of wealthier households, many of whom hold real estate to reap capital growth. Policy analysts have long suggested reining in the CGT discount as part of broader tax reform, with the twin aims of improving fairness and raising revenue.

The potential benefits of reform are clear in theory. A reduced CGT discount could:

• Raise government revenue that could be invested in housing supply or targeted affordability measures.

• Reduce the after-tax return on property investment, particularly for leveraged investors focused on capital growth.

• Improve equity in the tax system, since wealthier taxpayers disproportionately benefit from the current CGT discount.

Fiscal modelling from research bodies has estimated that even modest reductions to the CGT discount could deliver significant budget gains over time with funds that could be directed toward social and affordable housing, infrastructure that unlocks new supply, or other spending priorities that indirectly support affordability. From an equity perspective, limiting tax concessions that predominantly benefit higher-income investors can help make the overall system fairer, especially when contrasted with ordinary wage earners who have limited capacity to invest.

However, the central question for housing affordability is not whether CGT reform is fairer or would raise revenue, but whether it would meaningfully lower house prices or rents. And here the evidence suggests the effects would be real but modest.

Multiple analyses, including those discussed in media and policy circles, indicate that even a significant cut to the CGT discount (for example, reducing it from 50% to 25% and phasing changes in over several years) would likely only temper price growth rather than trigger a sharp drop. Estimates show price effects possibly in the range of low single digits relative to where prices otherwise would be a meaningful change for some buyers but small relative to the decades-long surge in prices driven by fundamental supply constraints.

That’s because housing affordability is driven predominantly by supply and demand fundamentals:

• Chronic under-supply of new homes, especially in growth corridors.

• Planning and zoning restrictions that delay or constrain development.

• Interest rates and credit conditions that affect borrowing capacity.

• Population growth and household formation trends.

Tax settings certainly influence demand, but they are only one side of the affordability equation. Without addressing supply bottlenecks, any demand-side tweaks like changes to CGT concessions are unlikely to deliver dramatic affordability gains.

There are also real risks and trade-offs with CGT reform. A higher tax burden on realised gains can discourage investors from selling, leading to ‘lock-in’ effects where properties remain with their current owners longer than they otherwise would, reducing market liquidity. Some investors might also respond by requiring higher yields from rentals to offset expected tax costs, which could put upward pressure on rents, at least in the short term. While some modelling suggests rent effects would be limited, industry groups often contest that view.

Policy design matters. Options like gradual phase-ins, exemptions for specific asset classes, or complementary reforms (e.g., negative gearing settings) can help reduce unintended consequences and political resistance. However, complexity rises with carve-outs and transitional rules, making any reform harder to communicate and implement.

So, will changing CGT concessions really improve property affordability in Australia? Yes, but only modestly and only as part of a broader strategy. CGT reform can help improve fairness, generate revenue, and slightly dampen speculative investment demand. But it is unlikely to dramatically lower prices or make housing affordable in isolation. For real progress, tax reform needs to be paired with supply-side solutions planning reform, infrastructure investment, and policies that increase the flow of new homes.