‘Focusing on investor participation while ignoring the underlying supply-demand imbalance confuses symptoms with causes’
The capital gains tax (CGT) discount appears to be the first major hot-button topic of the housing market in 2026.
Submissions have been flowing into the Select Committee on the Operation of the Capital Gains Tax Discount, with NSW Treasury’s recent submission catching the ire of one notable economist.
In its submission, NSW Treasury mulled the idea of reducing or removing the CGT discount, which is used by property investors to significantly reduce their annual tax bill, as a way of making the Australian housing market fairer and more affordable for first-home buyers and lower-income Australians.
It could also add around $23 billion to the NSW state coffers annually, according to the submission.
“Over time, as Australia’s economic and social landscape has evolved, a range of perspectives have emerged regarding the broader impacts of the CGT discount, including its effects on housing affordability, equality, and investment behaviour,” said NSW Treasury.
NSW Treasury’s submission has not gone down well with Tim Reardon (pictured), chief economist of the Housing Industry Association, who has offered a thorough rebuttal of the submission.
“This framing is appealing. It is also wrong,” said Reardon.
“Australia’s housing problem is not primarily about who owns homes. It is about how many homes exist relative to how many households need somewhere to live.
“Demand for housing is created by population growth and household formation, not by tenure. Whether a dwelling is owned by an investor or an owner occupier does not change the number of people who need shelter. Focusing on investor participation while ignoring the underlying supply-demand imbalance confuses symptoms with causes.”
Reardon does not believe penalising investors will make the supply-demand imbalance disappear. Rather, “it increases the cost of supplying homes to meet that demand and leads to fewer new homes delivered to market”.
He queried NSW Treasury’s contention that the CGT discount has created a “material injection of demand” of around around 1% of annual dwelling transaction values.
“This misunderstands how housing markets work,” said Reardon. “Prices are set at the margin, not by aggregate transaction values. Permanent tax changes are capitalised into prices rather than absorbed annually. That is why even advocates of CGT reform concede the impact on prices would be negligible, less than 1%.”
He agreed with NSW Treasury’s point that reducing the CGT discount will raise revenue for the state, “but it also reduces the supply of homes because it does so by increasing the required return on housing investment”.
“In a market where supply is already constrained, higher required returns mean fewer projects proceed, not more. Rents rise, construction falls, and the very households the reform claims to help face higher costs and fewer options,” he said.
In Reardon’s view, governments have created scarcity in the housing market through financing restrictions, planning, infrastructure pricing and regulatory delays.
“Housing is low risk not because of tax concessions but because policy settings guarantee scarcity,” he said. “Taxing investors for responding rationally to that environment does not improve productivity, it entrenches the underlying failure.
“If governments are serious about affordability, the focus must shift away from tenure and toward volume. That means fixing land supply, planning systems, infrastructure funding and tax layering on new construction. Until enough homes are built to meet population-driven demand, no amount of tax tinkering will make housing fair or affordable."
He added: "Treating a shortage as a fairness problem may be politically convenient. It does not make it economically sound.”
