why is the housing market in Australia so bad?
In: Economics
There’s two big things – Negative gearing and the capital gains tax discount.
Negative gearing allows a property owner to write off losses they incur on their property against their income. So if you’re spending more money on your rental property (mortgage payments, repairs etc.) than you make back in income (rental payments), you can use it to lower your taxable income. This incentivises owning rental properties as they’re essentially a risk-free investment.
Capital gains tax discounts: when you sell a property you get taxed on the profit you make in the sale. The capital gains tax discounts allow you to lower the amount of tax you pay on the transaction (and if you know the game well enough you don’t pay any at all). It means if you’ve got property you can sell it and keep maximum profits, making it easier to buy more properties.
These two things together give people with property a massive leg up on those who don’t. They have more money so they’re able to bid higher and they can leverage their existing properties for mortgages to buy another property. This has created a system where continual growth in property prices is needed to keep it propped up.
There’s more factors, like continual fights over development and a phobia of apartments, but in terms of why prices continue to climb, that’s the structural reason.
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