The dream of home ownership has turned into a nightmare for many people in Australia and New Zealand.

In Australia, the average house price has cracked A$1 million and hit NZ$880,000 in New Zealand, compared with a relatively modest A$560,000 in the UK and A$660,000 in the US.

A combination of ongoing immigration and a lack of new housing stock is locking younger people out of the housing market, unless they have the advantage of tapping the ‘bank of mum and dad’. Not only is this driving a housing crisis, it’s having a significant social impact in societies where home ownership has historically been something of a rite of passage.

The disparity in wealth between people who can and can’t access family funds to get onto the property ladder is widening social divisions. And, the disparity could increase significantly during the upcoming transfer of A$5 trillion in intergenerational wealth in both countries by 2050.

Governments on both sides of the Tasman have talked up housing policies, but their solutions have largely been focused on supply. In a world where property investment is also encouraged and facilitated, hard policy questions around taxation have been largely off the agenda, even though many critics say they are the only real path to a solution.

Generation of renters

In New Zealand, the government has been on the side of investors, as it relaxed the nation’s de facto capital gains tax on property investment: the bright-line test, which imposes taxes on the sale of property when sold within a certain period.

Instead of maintaining or extending the test, the current government reduced the period captured by the test to two years, down from 10 years for existing homes and five years for new builds.

Another concession to property investors at the expense of the tax take has been the reinstatement of interest deductibility on residential loans.

Back in 2015, New Zealand economist Shamubeel Eaqub and his wife Selena Eaqub called out the plight of many in their book Generation Rent: Rethinking New Zealand’s Priorities. The book explains how the incomes of average Kiwis have not kept up with house prices, consigning younger generations to a lifetime of rental uncertainty.

A decade on from the book, Eaqub sees some progress in terms of policy, even if it does favour investors and developers, but says increases in house prices have made the situation even worse for many.

“For seven decades or so through to the 1990s, home ownership rates in New Zealand were increasing, so many people were able to benefit massively in terms of their wealth, their domestic stability and their connection to community,” he says.

“There were also other economic benefits, because most small businesses in New Zealand are financed against the home. But home ownership has been falling since the 1990s and is now the lowest it has been since the 1950s. While we say we want to increase home ownership, we are failing to do that.”

When Eaqubs’s book was published in 2015, renters in New Zealand were paying an average of 23% of their income in rent. Today, that figure is at an all-time high of 28%.

“Policy has improved, particularly around housing supply, but those changes don’t have immediate effects and, in the meantime, prices and rents are still high,” he says. “We are building a lot more homes than we used to, so we are making modest progress but it’s not complete or comprehensive.

“Also, we tend to build a lot of houses that are new for owner-occupiers but not new supply for rentals or social housing and that is where the pressure is the greatest.

Policy costs us

Eaqub says that while New Zealand’s housing policy is “uncoordinated and untargeted” in terms of the real need, the government spends NZ$4 billion a year on housing subsidies. These comprise funds for temporary accommodation and rental assistance in the form of the accommodation supplement.

“There are something like 400,000 New Zealanders receiving this supplement and we only have 1.8 million households,” he says. “So, at last count 25% of all New Zealand households received some form of housing subsidy.”

Eaqub has a list of policies he believes New Zealand should implement to improve equitable access to home ownership, while also increasing housing supply. Some of these are around demand, to take the heat out of the market, and include levers such as higher interest rates, reduced credit availability, and action by the Reserve Bank of New Zealand on loan-to-income and debt servicing ratios.

He also advocates for tightening capital gains tax on property, which is effectively the bright-line test in New Zealand.

These policies, says Eaqub, need to be enacted at the same time as other policies such as encouraging longer rental agreements, as is done in Europe, and for local government to release some of its land holdings for new housing.

“Currently there is the will to only use some parts of the solution,” he says. “The government is happy to wind back incentives to flip property and, at the same time, they are doing really good work on improving the policies around planning and infrastructure.

“But it means that inconsistency and incoherence exist at the same time, and perhaps that is because some aspects of the solution are ideologically acceptable and others are not.”

Quarter-acre dream still alive

The New Zealand CA ANZ leader for tax and financial services, John Cuthbertson FCA, says he is cautiously optimistic and says “no-one in New Zealand has given up on the quarter-acre dream”.

Cuthbertson says that recent market conditions are moving back in favour of buyers. As economic factors align, it could create a “mind shift” in the younger generation, who “might actually see what they are capable of achieving”.

Cuthbertson points to falling house prices, along with lower interest rates, as signs that the market is adjusting in favour of buyers.

Unlike Australia, where superannuation savings are strictly for retirement, New Zealanders have been able to use their KiwiSaver retirement savings towards home deposits since legislative amendments about 10 years ago. Cuthbertson sees this as another factor facilitating home ownership.

In 2023–2024, around 77% of New Zealand first home buyers dipped into their KiwiSaver accounts to fund their home deposits, up from 65% in 2015–2016.

“I think that has been very effective and a fundamental tool for first home buyers, and there is plenty of upside in terms of giving them the ability to get a house,” says Cuthbertson.

The New Zealand Government’s changes to the bright-line test and interest deductibility have created a more favourable tax regime for investors, but with prices falling in many areas, property is “not seen as the cash cow or quick win” that it has been in the recent past.

“I think the government has done what it can in terms of tax settings,” says Cuthbertson. “I think the issue is capable of being fixed in New Zealand. It just depends on the relativity of income and wages to property values, and the level that people require to get a deposit.

“But if you get the massive transfer of generational wealth we are expecting and if interest rates don’t increase significantly, then we have a chance.”

Tax breaks for Australian investors

In Australia, the two main tax breaks for property investors are the 50% discount on capital gains tax (CGT) after holding an asset for 12 months and the negative gearing rules that enable investors to claim losses on investment property against their personal income.

Plans to allow people to use their superannuation to fund housing deposits, as with KiwiSaver in New Zealand, are opposed by the Labor Party but have been advocated by the Liberal-National Coalition.

Susan Franks CA, CA ANZ’s Australian tax, superannuation and financial advice leader, notes that it is unclear whether the relationship is one of correlation, causation, or a combination of both. However, research from the Australia Institute shows Australian house prices have increased more rapidly since the introduction of the CGT discount in 1999.

However, she says “tax reform alone cannot fix the housing crisis” and there would be major problems in any transition process in determining how any new rules might apply to pre-existing property investments.

“Fixing the housing crisis in Australia will need to address many inter-related issues and the taxation of housing is probably one of the more difficult of these issues to address,” Franks says. “One non-tax issue that should be addressed is the productivity of the property construction industry.”

The Productivity Commission, Franks says, has pointed out that productivity in the residential construction sector has been stagnant for 30 years. The focus needs to be on “reducing the regulatory burden, streamlining and speeding up approval processes, and improving workplace flexibility”.

Plans for reform

One organisation that recommends significant taxation reform in the property sector is the Australian Council of Social Service (ACOSS). It says the tax breaks on investment property cost the government around A$11 billion in 2023–2024 and will cost A$169 billion in the decade to 2035.

The ACOSS plan has three parts:

1. The first is to halve the CGT discount for individuals and trusts from 50% to 25% over five years, reducing it by 5% each year.

2. Second, ACOSS recommends the end of negative gearing. This would apply immediately for all new investments, with deductions phased out over five years for existing investments.

3. Finally, ACOSS would have the government reinvest the revenue this would claw back – around A$19 billion in the government’s four-year estimates – in social and affordable housing.

The impact of this, the organisation says, would be to reduce house prices by up to 4% and increase the proportion of homeowners in the economy by up to 5%.

“The CGT discount and negative gearing have massively inflated home prices, supercharged inequality and distorted investment away from more productive purposes, all at significant cost to the budget,” says ACOSS senior advisor James Hall.

"The impacts are staggering. Since the CGT discount was introduced in 1999, home prices have risen three times faster than wages and the median home price has doubled from four to eight times the median income in around the same time.”

The Albanese Government has a target to build an additional 1.2 million homes but appears to have no appetite for tax reform, with changes to negative gearing already ruled out.

This, says ACOSS, will only continue the inequality where the top 10% of income earners receive nearly 60% of the tax breaks and the wealthiest 10% of households own two thirds of the value of investment properties.

“To address the housing affordability crisis, we can’t just boost supply of housing. We must also limit excessive demand including by curbing these tax breaks, especially as they contribute little to supply, as over 80% of investor loans are for existing homes,” says Hall.

Take away

Visit the CA Library for Alan Kohler’s 2024 ebook, The Great Divide: Australia’s Housing Mess and How to Fix It, that examines the escalation in house prices and the profound effect it has on equality, and life in Australia.