The NSW government’s proposal to abolish capital gains tax (CGT) rebates could only hamper affordability as it discourages real estate investor activity, experts say.

InvestorKit founder and head of research Arjun Paliwal said that, contrary to what the NSW government believes, tax breaks on capital gains do not create an environment for “investor speculation”.

“Removing CGT discounts will only lead to greater supply constraints as investors will hold onto assets longer to create sales gains if this tax is abolished,” he told Your Investment Property.

“It could cause bigger price hikes, the opposite of what the thinking about this policy is.”

In its submission to Parliament’s Standing Committee on Taxes and Income, the NSW Department of Planning said the 50% CGT discount for properties held for more than one year skews incentives to purchase property for investment purposes.

“These tax breaks from real estate investment have contributed to the growing housing affordability problem,” the entry said.

“While the combined effect is likely to be a moderate rise in house prices, the main impact is the displacement of homeowners from tax-advantaged investors, especially those who already have higher incomes.”

Is the CGT discount really beneficial for investors?

Figures from the Australian Bureau of Statistics (ABS) show that new loan commitments were on the decline before the pandemic.

From the high of $10.1 billion in April 2015, new housing pledges reached a recent peak of $4.2 billion in May 2020.

“These figures suggest that tax incentives, such as the 50% capital gains exemptions, do very little to create speculation among investors,” said Mr Paliwal.

Ken Morrison, CEO of the Property Council of Australia, shared Paliwal’s views on the proposal impacting supply, adding that increasing housing taxes would not solve housing affordability.

“Capital gains tax increases would reduce the incentive to invest at a time when NSW and the nation need to build additional and more diverse homes,” he said.

“We strongly encourage all governments to prioritize ways to increase much-needed housing stock through the provision of well-zoned land, efficient approvals and strategic investment in infrastructure.”

How investors fit into the housing affordability debate

Investors play an important role in ensuring sufficient supply on the housing market.

Mr Paliwal said governments should be able to create policies that would improve “stock mobility” to make investing more attractive.

“This includes removing stamp duties; further enhancing capital gains benefits to encourage larger resale inventories as profits are made, rather than holding on to real estate longer to reach the same number due to taxes; and further encouraging downsizing for our older demographics,” he said. said.

Mr Paliwal said supporting new housing construction will not be enough to support affordability.

“It also has to come from Aussies owning assets to bring more to market — that’s where the mass real estate market sits, which will soften the price hike,” he said.

What investors should focus on

For Mr Paliwal, investors should set their sights on capital cities, especially the smaller cities such as Adelaide, which offer a perfect balance.

“In addition, keep an eye on many of our regional cities — it’s not just the satellite towns to our capitals that should have investors on their radar. Domestic and more distant regional cities are rapidly evolving in the current environment,” he said.

Mr Paliwal mentioned some factors that potential investors should consider in the current market conditions:

  • Capital growth now taking place with large amounts
  • Very fast rental results, which in most cases can insure tenants in the first open house
  • Affordable Investment Opportunities
  • Great rental income
  • Prior to this boom there was slow performance, we are led to believe there are legs in this boom for Adelaide
  • A much stronger and faster growing local economy
  • An economy and city that continues to diversify itself and grows into a city that touches the trifecta of (work-live-play)

Mr Paliwal said it is ideal for investors to focus on only houses and properties with gross rental yields of 3.8% to 5%.

“Be open to as many cities as possible, spreading the net wide will allow better market and asset selection,” he said.

“It’s also critical to remember that price doesn’t always equate to quality. Investors need to be able to grow wealth over the long term without straining themselves and their personal finances.”

Photo by Devin Avery on Unsplash