Australia’s two million-plus property investors – about 60% of whom negatively gear – are expecting to be affected if the government changes property tax concessions before the next election.
The government has confirmed that Treasury is reviewing negative gearing and capital gains tax (CGT) concessions to help increase property availability and affordability and potentially ease the housing crisis. Capping the number of properties a person could negatively gear (excluding those who currently negatively gear) is reportedly one of the key changes being considered in the review.
Negative gearing allows taxpayers to claim tax deductions for expenses related to owning an investment property. They may also be eligible for a reduced CGT when they sell the property.
It is important to note that while both Australian and foreign (or non-resident) investors can negatively gear their investment properties in Australia, foreign investors are not entitled to the 50% CGT discount for assets acquired after 8 May 2012.
Although much has been reported about the potential impact on rental property supply, rents, property prices, the government budget, and wealth inequality, changes to negative gearing and CGT could also have impacts on capital flow and migration in Australia.
This piece aims to shift the focus from the domestic impacts of negative gearing and CGT to a broader discussion on their international effects on the Australian economy. It explores how changes to these tax concessions might influence foreign real estate investment, economic migration, and capital flight in Australia. This analysis seeks to provide Australian voters with a broader understanding of how adjustments to negative gearing and CGT could affect the country’s macroeconomic landscape.
Foreign real estate investment
First, I consider how foreign real estate investors might respond to the removal or restriction of tax incentives.
Slower property price growth, resulting in lower-than-expected returns on investment properties, would diminish Australia’s appeal as a destination for foreign real estate investors. As several empirical studies have demonstrated, property price growth and investment returns are key drivers of property investment decisions across countries.
While foreign real estate investments can help alleviate housing shortages in Australia, they do not significantly impact housing affordability. The Australian Taxation Office (ATO) reported that foreign buyers made 5,360 purchases valued at $4.9 billion in 2022-23, representing about 1% of total property purchases in Australia. CoreLogic’s Head of Research, Eliza Owen, stated that foreign real estate investments are not related to housing affordability crisis. This view aligns with the findings of previous empirical studies conducted in Australia, which argue that, despite having slightly raising the prices of higher-priced dwellings, foreign investment in residential property has, on balance, increased the overall supply of housing, thereby stimulating construction activity.
Regarding the potential effects of reduced foreign real estate investment in Australia, a study I co-authored presented econometric evidence indicating that a 10% decrease in foreign investment in new residential real estate leads to a 1.95% increase in house prices.
Economic migration
Removing or curbing tax incentives could reduce Australia’s overall attractiveness to economic migrants, particularly those interested in real estate investment.
Property investment in Australia appeals to overseas buyers due to the country’s relative political stability, consistent price growth over time, stable rental income from high occupancy rates, and tax incentives for investors.
Over the past decade, many migrants have come to Australia through the Significant Investor Visa (SIV) program, using property purchases as part of their wealth diversification strategy. From November 2012, when the program started, to June 2020, 2,349 SIV visas were granted.
With the recent abolition of the SIV visa and the potential removal of tax incentives for property investment, the attractiveness of Australian real estate could decline, possibly deterring some migrants, particularly wealthy investors, from choosing Australia as their preferred investment destination.
However, it can be argued that changes to tax policies for property investors may reduce investment demand, leading to lower house prices and ultimately making housing more affordable. This could attract more skilled migrants to the country, which in turn would boost labour productivity, employment, and innovation in Australia.
Coupled with a cost of living crisis, high housing costs and limited access to affordable housing may push talented and productive migrants to leave Australia, seeking better opportunities either in their home countries or other destinations. This potential migrant “brain drain” could further undermine the country’s already sluggish labour productivity growth.
Capital flight
Uncertainty leading up to any announcement, let alone significant rollback of tax concessions in the future, could potentially trigger capital flight from Australia. Capital flight is defined as “a sharp increase in gross capital outflows”.
If investors – both citizens and permanent visa holders – believe their potential returns will diminish due to new policies, particularly with a drop in property prices, they may redirect their capital to countries with more favourable tax regimes.
For example, the United Arab Emirates (UAE), one of the world’s most attractive business destinations due to its favourable tax policies, strategic location, and world-class infrastructure, can be appealing investment destination for Australian property investors. Wealthy investors are the most likely to have the flexibility to move their investments offshore. Such a shift, combined with a drop in domestic investment, would negatively impact Australia’s economic growth.
To put this into perspective, ceteris paribus, if 5% of Australia’s 2 million property investors (approximately 102,350 investors) decide to sell at least one of their properties following changes to tax incentives and move their funds overseas, around $99.6 billion could exit the country, given the mean price of residential dwellings in Australia is $973,300 as of the June Quarter 2024.
Ceteris paribus, if we assume that the multiplier effect of private investment is similar to the fiscal multiplier of public infrastructure investment in Australia, estimated to be between 1.1 and 1.3 after two years, then a $99.6 billion capital flight could reduce gross domestic product (GDP) by approximately $109.5 to $129.4 billion over two years.
Of course, Australian property investors could also shift their capital into alternative domestic asset classes, such as shares, corporate bonds, and government bonds.
Conclusion
Policymakers should consider not only the supply of rental properties, high purchase and rental prices, wealth inequality, and the government budget but also the international implications of changes to negative gearing and CGT on the broader economy.
Specifically, the effects of changes to tax incentives for property investment on foreign real estate investment, economic migration, and capital flight should be carefully evaluated, as shifts in these factors can significantly impact economic activity, labour productivity, housing supply, and prices.
Moreover, Australian voters should be mindful of the international implications of these tax changes on labour productivity growth and economic output, as these factors affect the overall well-being and prosperity of Australians.
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