Capital gains tax would reduce house prices, Westpac economists estimate

Capital gains tax would reduce house prices, Westpac economists estimate

A 10% capital gains tax would reduce house prices by 10.9%, Westpac economists estimate.

The Government’s Tax Working Group is investigating whether changes to the tax system would affect house prices.

Westpac economists have modelled the different options being proposed and, while all lead to higher home ownership rates, the various scenarios entail property price drops of up to 19%.

The most commonly-suggested change – a capital gains tax of 10%  would lead to a drop in house prices of 10.9% and an increase of rents of 5.5%.  

Westpac chief economist Dominick Stephens said the projections did not necessarily mean house prices would immediately drop, but it could mean a long period of stagnation with similar effects.

Here’s a summary of the options and the projected effects:

 

Capital gains tax of 10%

Tax paid on the gain in value other than the family home taxed at 10%

  •   Impact on house prices: -10.9%

  •   Impact on rents: +5.5%

 

Property tax of 0.5%

Similar to rates – a 0.5% tax paid yearly to central Government

  •   Impact on house prices: -10.5%

  •   Impact on rents: +5.2%

 

Land tax of 1%

Tax levied on value of unimproved land, owner-occupiers exempt

  •   Impact on house prices: -9.5%

  •   Impact on rents: +4.8%

 

Deemed rate of return 5%

For investors, no tax on rental income but expenses would not be tax deductible. It would be assumed that investors are earning 5% return on the equity in their rental properties and income tax would be levied on that.

E.g. $400,000 of equity in a rental property = approx. $6,600 tax per annum (at top 33% tax rate)

  •   Impact on house prices: -19.5%

  •   Impact on rents: +9.6%

 

Ringfencing

From April 2019, the Government is planning to phase out landlords’ ability to use losses on rental properties to offset tax liabilities from other sources.

Instead, landlords will receive tax credits that can only be used to offset future tax on their property portfolio – rental property tax credits will be “ringfenced”

Estimate not available with investment value approach:

  •   Impact on house prices: 0% to -6%

  •   Impact on rents: Up

 

Top rate of income tax reduced from 33% to 30%

Property investing is more attractive when there’s a bigger gap between the capital gains tax (currently at 0%) and income tax (currently top rate at 33%).

Reducing the gap from 33% to 30% would make property investing less attractive.

  •   Impact on house prices: -2.8%

  •   Impact on rents: +1.6%

A more detailed look at the possible scenarios and their outcomes, including details of the modelling and the assumptions built in can be found in our latest report on Tax and House prices.

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