The Problem With Land As An Investment
Why does the Australian Federal Government treat property as an investment, when the best option is for people to own the property they live in?
Everyone needs to live on land, whether in their own house (or unit) or a rental property. The best option for the community is for people to own the property they live in. While this is a high cost initially, over time it will increase their disposable income and reduce the cost burden on government, particularly for older people. The option of lifelong renting is one that places a significant burden on elderly people.
A recent report Renting in retirement: Why Rent Assistance needs to rise (Coates et al., 13/2/2025) stated the following:
- “Two in three retirees who rent in the private market live in poverty – and the problem is set to get worse.”
- “Most older working Australians who rent do not have sufficient savings to keep paying rent in retirement.”
In the article, the authors call on the government to provide more commonwealth rent assistance, to supplement the age pension.
One would expect Government policy to support individual home ownership. However, the Federal Government treats land as an investment through:
- Negative gearing
- Capital gains tax discounting.
This is well recognized as a significant contributor to the increase in house prices by creating a second, wealthier property market through the investment market. Government policies favour the investment market at the expense of individual ownership.
Negative Gearing
A Timeline
1936 – Introduced in Australia as a policy designed to encourage investment in housing, to increase housing supply and stabilise rents.
1985 – the government removed the ability for rental losses to reduce the tax on other sources of income.
1987 – housing shortages and rising rents led to the reinstatement of negative gearing.
2016/2019 – the government proposed that tax benefits should only apply to new housing.
The Success Of Negative Gearing
There has been much political debate and attempts to reform the policy around negative gearing since it was introduced.
Why? Because negative gearing favours wealthier people who invest in multiple properties and it fuels the demand for investment properties, thus increasing house prices.
Negative gearing allows a wealthy person to buy a property and claim all expenses as a tax deduction against their other income, if the rental income does not cover their expenses.
An investment property reduces tax and accumulates wealth, through increased property valuations, for the wealthy. Its original purpose may have been to provide low rental housing, but the outcome has been a significant increase in property prices and rents.
As a means to providing low cost housing, negative gearing is a total failure.
“Negative gearing on its own is not the answer to housing affordability. The whole system needs an overhaul, with a combination of measures needed to adequately address affordability, for now and for future generations.” (Cull, 2024)
Capital Gains Tax Discounting
Capital gains tax is a tax on profits made when a property is sold. It was introduced in 1985 and discounted in 1999 by 50% for Australian residents if the property was owned for more than 12 months.
As property prices are very high, generally with a large appreciation, this is a very lucrative discount which further enhances the investment potential of land, and therefore increases demand and prices.
These policies have worked so well for investors that:
“Only 1% of Australian taxpayers own nearly a quarter of all property investments across the country, amid concerns over escalating rates of wealth concentration.” (theguardian.com)
“Data provided by the Australian Taxation Office has revealed the extent of that concentration, with more than 7% of property investors – or 215,321 people – accounting for 25% of all property investments.” (theguardian.com)
Increasingly it is becoming more difficult for people without generational wealth to enter the property market. Dr Lawrence Tony, a senior lecturer in urbanism at the University of Sydney, has identified that investors are the ‘biggest driving force’ and the ones who’ll gain the most from the increasing housing prices. (theguardian.com)
Property investment provides greater returns than gold, is more stable than gold and provides a mechanism for tax reduction. The land value of my house has increased 5 times as much as gold would have over the same period; the property value (house + land) by an estimated 1.3 times gold, after tax.
The Impacts Of Government Policy On Housing Affordability
“Secure and affordable housing is fundamental to the wellbeing of Australians. Home ownership continues to be a widely held aspiration in Australia, as it affords owners with security of housing tenure and both long–term social and economic benefits”. (AIHW, 2024)
We have to ask our politicians why they allow such an unfair system to continue?
44% of Federal Government politicians own investment properties, so I guess there’s not much incentive to make changes. 2.2 million voters own investment properties.
Taking no action will put home ownership out of reach for even more Australians. (Cull, 2024)
What Can Be Done?
Governments need to focus policies on:
- Encouraging first home owners into the market and discouraging investors
- Applying downward pressure on prices.
Governments have been reluctant to change negative gearing and capital gains tax rules for fear of collapsing the rental market, but changes could be made that would transfer investment properties to owner-occupier properties without reducing the housing stock.
For example, negative gearing could be abolished and the capital gains tax discount limited to sales to first home buyers. Sales would be conducted as closed bids. The seller could choose a first home buyer with a low bid because their CGT liability would be considerably lower than for all other buyers, giving them a better return.
Create downward pressure on the market
This would create downward pressure on the whole land market as sellers sought to compete for first home buyers. Unlike current grants that give the buyer more to spend on a property, thereby applying upward pressure on prices, this policy would allow first home buyers to bid less while enabling the seller to get more through the 50% CGT discount.
By abolishing negative gearing and the CGT discount for non first home buyer transactions, the government will benefit from higher tax revenue. This could be used to allow interest payments to be tax deductable for first home buyers for say, 5 years.
These changes will transform the market from an investment market to a market focused on the wellbeing of younger Australians, and the long term health of the Australian economy, while having minimal impact on housing stock (which is already limited by other factors).
Improve housing affordability
This reform would have an immediate impact on the affordability of housing without putting upward pressure on prices, a long term benefit to home owners through increased disposable income and a significant long term benefit for government as home owners aged by reducing social benefits payments such as rent relief.
This is only a part of the reforms needed. In addition, State Governments need to reform the way land is valued. See more
References
Coates, B., Bowes, M. and Moloney, J. (2025) Renting in retirement: Why Rent Assistance needs to rise, Grattan Institute. Available at: https://grattan.edu.au/report/renting-in-retirement-why-rent-assistance-needs-to-rise/ (Accessed: 19 March 2025).
Cull, M. (2024) Opinion: What is negative gearing and what is it doing to housing affordability?, Western Sydney University. Available at: https://www.westernsydney.edu.au/newscentre/news_centre/more_news_stories/what_is_negative_gearing_and_what_is_it_doing_to_housing_affordability (Accessed: 19 March 2025).
Australian Institute of Health and Welfare. (2024). Home ownership and housing tenure. Retrieved from https://www.aihw.gov.au/reports/australias-welfare/home-ownership-and-housing-tenure
About
As someone who is concerned about the impact of land valuations on the Australian economy, Keith draws on his experience to highlight the issues that need to be discussed and addressed.
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