Governments vested interest in maintaining property price growth

There are many large and powerful institutions that have a vested interest in rising property prices. But all levels of government (i.e., federal, state and local) probably have the most to gain, as I’ll explain in this blog. This leads to two important observations. Firstly, the government is the main contributor to housing affordability pressures i.e., making housing less affordable. Secondly, government tax revenues are dependent upon rising prices and demand for property. I don’t want to debate whether this is right or wrong. I’m merely interested in highlighting economic and financial reality, as I think it’s helpful to inform personal investment decisions. The federal government revenueThe negative gearing tax break afforded to property investors has been widely debated since it was introduced in 1985. You will recall that Bill Shorten proposed to remove negative gearing in his unsuccessful federal election campaign in 2019. But its only half of the tax story.  Using ATO data for the 2019/20 tax year, it appears that property investors claimed circa $728.5 million dollars of negative gearing income losses. But this is dwarfed by the taxable capital gains that taxpayers declared in the same year of over $20 billion. Of course these gains come from many sources (not just property investments) including share investments, sale of businesses, and so on. But property is a lumpy asset, so it tends to give rise to large CGT liabilities. Unfortunately, more granular information was unavailable. I’ve said in this blog many times, the most efficient way to build wealth is to invest in properties that have the attributes to drive strong capital growth over the long run, even if they produce a negative cash flow (because the rental yields are low). The wealth accumulating power of compounding capital growth will eventually dwarf any negative cash flow. The same is true when it comes to federal government tax revenue. The government generates a lot of (CGT) taxation revenue from rising property prices. State government tax revenue is highly dependent on property Australian states and territories generate two main taxation revenue streams from property, being stamp duty (i.e., transfer duty payable when a property is sold) and land tax. These two property taxes generate a lot of tax revenue for the states. In fact, for most states, property taxes are the single largest source of taxation revenue. For example:  §  VIC: budgeted property revenue of $14 billion which accounts for 46.5% of the state’s total taxation revenue. §  NSW: budgeted property revenue of $16.5 billion which accounts for 41.6% of the state’s total taxation revenue.§  QLD: budgeted property revenue of $6.5 billion which accounts for 34.5% of the state’s total taxation revenue. Transfer duty is driven by the volume and value of property sales. The states are responsible for regulating the property market. It should come as no surprise that state governments have been quite lax with regulating these markets and/or enforcing consumer protections. For example, financial advisors have very onerous obligations if they want to recommend a client invests $100k into the share market (regulated by the federal government). However, property buyers’ agents have very few obligations (virtually none) if they recommend a client invest $1m into an investment property. States want more property transactions to generate more tax revenue Land tax revenue is driven by land valuaTo subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/