Former Treasury Secretary and Reserve Bank Governor Bernie Fraser has called for sweeping changes to negative gearing and capital gains tax concessions, arguing they have fuelled house price growth and locked younger Australians out of home ownership.
Speaking to David Speers on ABC’s Insiders On Background podcast, Fraser said both tax settings “should be looked at” as the government considers options ahead of the May budget.
“My really starting point with this view of taxes and other changes that might and should be made to the housing market,” he said, “I start with the position that for many years now so many Australian people and workers and other people of modest means and young couples that dream of owning their own home… have seen those dreams blow up because housing prices have gone up so much in the last 20 years.”
He noted that “the increase in house prices over the last 20 odd years has been twice the rate of increase in average earnings. So there’s an enormous gap there.”
Fraser argued that rising prices reflect both increased demand and limited supply, but said tax policy has played a central role in driving demand from investors.
“The prices have gone up for two reasons really,” he said. “There’s been an increase in the demand for houses and there’s been limited increase in the supply of housing.”
While population growth and migration contribute to demand, he said “a lot of the demand for housing that is contributing to the increase in prices is the very favourable taxation arrangements that surround investment in housing.”
Negative gearing, he said, “was viewed as a way of encouraging investment in houses and particularly rental housing. And then the capital gains tax was really to encourage investment… They did that with spades but it wasn’t investing in houses in the supply of houses. It was investing in houses as attractive investment opportunities as wealth creation.”
He described the current settings as “the tax environment… so attractive with the combination of the negative gearing and then coming along with the capital gains tax… and then the absence of any inheritance tax or wealth taxes makes investment in housing an extremely attractive thing to do if you’re wealthy.”
Asked whether limiting negative gearing to two properties would be sufficient, Fraser was sceptical. “If you’re going to do these things, it’s often to do them full-bloodedly,” he said.
“I’m a bit reluctant to keep taxation arrangements there that are conducive to encouraging increased investment in housing by wealthy people who are pursuing it not with the view of establishing more houses but for making attractive investments for wealth purposes.”
He suggested changes should apply prospectively rather than retrospectively, but maintained that “anything that winds down the tax attractiveness of investing in housing by wealthy investors and thereby contributes to a reduction in the demand that’s forcing up prices” would help.
On capital gains tax, he said proposals to reduce the discount from 50 per cent to 25 per cent may still leave incentives intact. “That’s still going to be part of an attractive tax environment for wealthy investors to continue to hammer housing as an investment opportunity.”
Fraser framed housing as a question of principle. “I think Australians should have as a right rather than as a privilege” the ability to own a home, he said.
Bernie Fraser rejected claims that curbing investor tax breaks would reduce housing supply, arguing existing concessions have failed to lift rental stock. “The people who get the benefit of the tax concessions… that’s not leading to any increase in the supply of housing. That’s leading to the attractiveness of investing in housing by wealthy investors and that’s driving up the prices”
Responding to concerns that reducing investor incentives could shrink supply, he argued the existing concessions have not delivered more rental housing. “The people who get the benefit of the tax concessions… that’s not leading to any increase in the supply of housing. That’s leading to the attractiveness of investing in housing by wealthy investors and that’s driving up the prices.”
He said supply constraints must also be addressed, citing land availability, labour shortages and rising material costs. “The supply side is just not functioning very well at all,” he said.
Fraser also reflected on the political dimension of housing policy, noting that rising house prices have long been seen as electorally advantageous. He expressed hope that shifting demographics could alter that calculation.
“I would hope it would,” he said of the prospect that younger voters priced out of the market might change the politics. “My hope is that Labor is more concerned about the fairness and inequity of these arrangements that lead to wealthy investors doing okay but at the expense of average income earners.”
Turning to government spending, Fraser rejected claims that current expenditure levels are driving inflation. “I don’t believe it’s part of the problem with inflation,” he said, adding that most economists share that view.
He acknowledged potential risks “down the track if the spending goes on without appropriate funding” but said recent spending by Labor had not been “a significant contributor to inflation.”
On broader tax reform, Fraser said there is “always a case for looking at broader pictures of tax reform” but stressed that housing requires urgent action.
“We’ve got to the point where there has to be action rather than talk,” he said. “The first thing that should be clarified… is what’s the basic purpose of housing? Is it there to provide an opportunity for Australians to acquire decent housing… or is it there to provide incentives for wealthy people to invest?”
Fraser expressed disappointment that Labor abandoned proposed changes after its 2019 election defeat, saying “those changes were worth persevering with.”
He said the focus should remain on fairness and access. “It should be a right for all Australians including young people, people on average incomes to have access to decent and affordable housing,” he said.
The interview was broadcast on ABC’s Insiders On Background podcast.
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