Finder’s RBA Survey: Experts divided on whether negative gearing changes will help first home buyers

The nation's experts are split on whether the government's proposed negative gearing and capital gains tax changes will help first home buyers.

In this month's Finder RBA Cash Rate Survey™, 38 experts and economists weighed in on future cash rate moves and other issues relating to the state of the economy.

Almost all panellists (97%, 37/38) expect the RBA to hold the cash rate on Tuesday, keeping it at 4.35%.

Experts were asked to weigh in on the government's proposed changes to Negative Gearing and the CGT discount. Just over half (52%, 16/31) who weighed in* said the changes would help first home buyers, while 48% (15/31) said they wouldn't.

Data from Finder's Consumer Sentiment Tracker shows 36% of Australians don't think they'll ever be able to afford their own property.

But the panel was clearer on the wider impact: 63% (19/30) said the changes would be bad for small business, and 68% (21/31) said start-ups should be exempt from the CGT change.

Richard Whitten, home loans expert at Finder, said the changes could tilt the field toward first home buyers, but won't fix affordability on their own.

"Reducing the tax advantages for investors will give first home buyers a better shot at competing for a property.

"But the experts are clear that this alone won't fix affordability. Australia still has a fundamental housing shortage, and that's what ultimately drives prices," Whitten said.

Graham Cooke from Aussie Insights said the change could usher in a rare buyer's market – with a warning for recent buyers.

"The big winners here will be first-time buyers.

"Anyone who has been saving a deposit and waiting for the right opportunity to buy their first home will now be operating in Australia's first buyer's market in many years.

"While this is excellent news for young people looking to get onto the property ladder, it is a significant concern for those who purchased recently with sub-10% deposits, as they are now at risk of falling into negative equity.

"Those buyers will be hoping the market bounces back quickly," Cooke said.

The warning comes as the panel forecasts property prices to soften over the next 12 months, with average forecast falls of 4.2% in Sydney and 3.7% in Melbourne, while Perth is tipped to edge up 0.5%.

Shane Oliver from AMP said the changes were a mixed bag for first home buyers.

"By depressing investor demand it will help some FHBs get into the property market, but they won't make a huge difference to poor housing affordability because it won't address the fundamental housing shortage and could even make it worse over time (because there will be less investors as a result of the tax changes which will mean less supply. Even the Budget papers say supply will be lower by 35,000 homes over a decade.

"By depressing housing supply it could make things harder for renters. It also removes opportunities for wealth generation for younger generations that older generations have been able to take advantage of.

"The CGT changes also risk reducing the availability of risk capital in Australia (because they bias investors to safer investments less dependent on capital growth) and this could work against the need to boost productivity," Oliver said.

Evgenia Dechter from UNSW said the proposed changes could help first-home buyers somewhat by reducing the tax advantages available to investors.

"However, housing affordability is also a supply problem, so the effect for first-home buyers is likely to be modest unless planning, infrastructure, and construction costs are also addressed," Dechter said.

Tim Reardon from the HIA warned the changes could worsen the housing shortage.

"Housing supply will be reduced by the increase in taxation. This worsens the housing problems and exacerbates the barriers to first home buyers entering the market.

"Once a change is made, there needs to be consistency across asset classes or the adverse impact on housing will be worse.

"This means that FHBs do not benefit from the Budget, investor activity will remain strong and small businesses will bear a higher tax burden," Reardon said.

*Experts are not required to answer every question in the survey.

You can read more on what our experts had to say about the cash rate here.

Here's the full list of what experts had to say about the proposed changes to Negative Gearing and the CGT discount:

Leanne Pilkington, Laing+Simmons: "The proposed changes fail to consider that most property investors depend on their investment for income, often in retirement, so as not to rely on welfare. To remove their rights is unreasonable and also fails to recognise the important role they play in providing rental supply, of which there is already a critical shortage."

Mark Crosby, Monash University: "As usual changes to our tax system are piecemeal and ill-designed. When will we start again?"

Mark O'Flynn, Oxlade Financial: "I think the existing CGT rules were too favourable for residential property investors which skewed investment behaviour to favour residential property. The discount should remain for other assets as it is easy to administer, especially for small businesses which have had to sacrifice a lot of income to build their businesses."

Kyle Rodda, Capital.com: "Fairness and shifting the tax burden needs to be balanced with the need to encourage investment in new assets and innovation."

Nicholas Frappell, ABC Refinery: "It is likely that partial grandfathering of CGT changes will favour investors relatively more than first time buyers, and that CGT will not help the formation of small businesses."

Nalini Prasad, UNSW Sydney: "I think it's difficult to have a CGT discount for one asset but not for others. Investors will switch to the asset with a larger CGT discount leading to higher prices in that asset. Most small businesses are not subject to the tax changes, so I think it will have a minimal effect on these businesses."

Evgenia Dechter, UNSW: "The proposed changes could help first-home buyers somewhat by reducing the tax advantages available to investors. However, housing affordability is also a supply problem, so the effect for first-home buyers is likely to be modest unless planning, infrastructure, and construction costs are also addressed.

"Applying the CGT changes broadly to shares, start-ups, and small businesses may discourage productive investment, entrepreneurship, and risk-taking. That said, a tax system should be fairly neutral, so investors choose assets because they are productive, not because they receive more favourable tax treatment. There may be a case for targeted concessional treatment for new housing supply and for start-ups and small businesses, given the broader economic benefits. But special arrangements and concessions can make the system more complex and distort investment decisions.

"The proposed CGT changes would make Australia's tax treatment of capital gains less internationally competitive, with potential implications for investment, innovation, and growth."

Dale Gillham, Wealth Within Group: "The current tax systems have made running a small business extremely difficult, as a very large portion of all revenues is being taxed. Some are reporting upwards of 60% to 70%, which not only makes running a small business harder but also much riskier. We are seeing record numbers of bankruptcies as a result."

Geoffrey Kingston, Macquarie University Business School: "The proposed changes are retrospective and will hurt business investment."

Nicholas Gruen, Lateral Economics: "I'm not sure I'd completely exempt start-ups from the new arrangements, but a regime targeted to their incentives may be appropriate. At the very least averaging should be available."

Adj Prof Noel Whittaker, QUT: "The tax changes are allegedly in response to what Labor sees as intergenerational inequality, which is simply a social construct put about by Labor so they've got people to help."

Scott Kuru, Freedom Property Investors: "Although there are all sorts of exemptions for small business from these CGT changes, the main problem is confidence. If people lack confidence that the government is fully backing them to stick their necks out, take a risk and start a business, they'll sit on their hands."

Stella Huangfu, University of Sydney: "I think reducing tax concessions for property investors may provide some benefit to first home buyers, although the effect is likely to be modest unless housing supply also increases.

"I support retaining the CGT discount for shares because it encourages long-term investment and accounts for inflation. However, I do not think start-ups should receive a separate exemption, as this would complicate the tax system and could create distortions. Overall, I do not expect the proposed changes to have a uniformly negative impact on small businesses, although some may be affected more than others."

Cameron Kusher, Kusher Consulting: "The government has been clear that they believe there has been over-investment in housing and under-investment elsewhere. If you don't as many people investing in housing make changes for that asset class but don't make it less attractive to invest in all asset classes."

Craig Emerson, Emerson Economics: "Businesses will pay CGT only on real, realised gains, back to 1995 - and there was nothing wrong with these arrangements."

Jakob Madsen, University of Western Australia: "It makes sense to replace the capital gains tax (CGT) discount with inflation indexation. Such a system is fairer because it taxes only real capital gains rather than gains arising from inflation. Moreover, the effect on asset returns is likely to be much smaller than many people assume. In my view, the introduction of the CGT discount in the first place was misguided.

"I also doubt that replacing the CGT discount with inflation indexation would have a significant effect on the housing market. In particular, it is unlikely to improve housing affordability for first-home buyers because it does not address the underlying causes of the problem. These include shortages of skilled tradespeople, inefficiencies and regulatory problems in the construction sector, and strong demand pressures arising from high levels of immigration. Without addressing these structural issues, changes to CGT are unlikely to have a substantial impact on house prices."

Stephen Miller, GSFM: "I think that the measures are by and large justified so that capital and labour income are treated equitably. There is, however, some big devil in the detail (no 5-year averaging; lack of offsetting income tax cuts; maintenance of bracket creep; no GST increase to fund less onerous taxes on income and capital)."

Saul Eslake, Corinna Economic Advisory: "Small business already gets lots of concessions - 5 pc pts on company tax, exemptions from CGT, exemption from payroll tax, instant asset write offs etc - despite which, small business has in aggregate hardly created any jobs over the past 15 years, have productivity which is ~ 20% lower than medium or large businesses, and are less likely to innovate than medium or large businesses. On the other hand small business accounts for more than 50% of the personal and company income tax which the ATO doesn't collect due to non-compliance with tax laws, according to the ATO' "Tax Gap" statistics. More often than not, running a small business is a "lifestyle choice": which is fair enough, I have made that choice myself. But why should it carry privileged tax treatment?"

Matt Turner, GSC Finance: "This is an unpopular opinion but I do believe that small businesses and start-ups have sufficient opportunities to minimise tax throughout the journey of operating the business so at some stage there will need to be some tax paid, particularly in the event of sale - however effort needs to be rewarded so having sufficient waivers would be required. There needs to be a distinction with effort and passive capital growth. The minimum 30% tax on trust distributions is certainly bad for small business with so many operating that structure."

Tim Reardon, HIA: "Housing supply will be reduced by the increase in taxation. This worsens the housing problems and exacerbates the barriers to FHBs entering the market. Once a change is made, there needs to be consistency across asset classes or the adverse impact on housing will be worse. This means that FHBs do not benefit from the Budget, investor activity will remain strong and small businesses will bear a higher tax burden."

Graham Cooke, Aussie Insights: "The big winners here will be first-time buyers. Anyone who has been saving a deposit and waiting for the right opportunity to buy their first home will now be operating in Australia's first buyer's market in many years. While this is excellent news for young people looking to get onto the property ladder, it is a significant concern for those who purchased recently with sub-10% deposits, as they are now at risk of falling into negative equity. Those buyers will be hoping the market bounces back quickly."

Shane Oliver, AMP: "Its mixed as to whether the changes will help first home buyers - yes by depressing investor demand it will help some FHBs get into the property market, but they won't make a huge difference to poor housing affordability because it won't address the fundamental housing shortage and could even make it worse over time (because there will be less investors as a result of the tax changes which will mean less supply - even the Budget papers say supply will be lower by 35,000 homes over a decade). By depressing housing supply it could make things harder for renters. It also removes opportunities for wealth generation for younger generations that older generations have been able to take advantage of. The CGT changes also risk reducing the availability of risk capital in Australia (because they bias investors to safer investments less dependent on capital growth) and this could work against the need to boost productivity."