Housing Costs Squeeze the First Home Buyer

If you live in Sydney (or any other capital, for that matter) and bought real estate 20 years ago, you're looking good financially. If you're a parent enjoying this pleasant circumstance, give some thought to how your kids will cope with buying a first home.

An article How parents are paying a gains tax by Adele Horin raises this subject, and points to parents who feel duty bound to use the capital gain on their home to finance their kids' first plunge into real estate.

I'm no different to the people Horin describes, with the exeception that that it will be some years till my kids may need that sort of financial assistance.

Personally, I'd prefer that real estate was more affordable to the first home buyer, eg, my kids in later years, rather than have a paper profit on my property.

The point she makes regarding concessional tax rates on property in fueling the boom is spot on:

I don't know how the circle of academics feels about capital gains tax, but it's a dirty word to most home-loving Australians. Being free to make a huge, tax-free profit on the sale of the family home is part of the Australian way of life. Yet the generous tax treatment of housing is one reason young people can't get over the threshold without parental assistance.

Housing prices have been driven sky-high not just by the operation of the free market, low interest rates, population growth, and land shortages. Federal Government policy has also played a part.

The failure to tax capital gains on homes - while taxing capital gains from other investments, such as shares - distorts the market. It means people plough as much money as they can into their homes, pushing up house prices. Or they are prepared to pay huge sums to upgrade to a bigger, better house.

And the generous tax concessions for property investors, in terms of capital gains and negative gearing, have also hurt first-time buyers. A young couple is no competition in a bidding war against investors buying their second or third property, with an eye to the handy deductions, and eventual windfall.

Political parties think it's suicide even alluding to the possibility of taxing of the family home, but surely it's time for some thought to be given to this.

Some type of gains tax to dampen the housing prices would benefit young buyers entering the market. It would also benefit the economy in general as more productive investments wouldn't be competing with the tax free or concessional gains to be had at present in real estate.

One other point on capital gains tax. The Howard government halved gains tax several years ago, making it easier to avoid tax if you can convert income into a capital gain. The result is that PAYE tax payers have to shoulder a higher tax burden due to this tax avoidance. Any changes to the gains tax should include raising the rate to the same levels as income tax.