Why CGT changes won’t shift investor behaviour

The current debate about reducing the 50 per cent capital gains tax (CGT) discount assumes property investors are primarily motivated by tax savings. In practice, this overlooks how real-world investment decisions are made, particularly among high-net-worth (HNW) investors.

In my work with large-scale and sophisticated property owners, the CGT discount is rarely a driver of property investment decisions. A cut to the discount is therefore unlikely to produce the behavioural change policymakers expect.

For seasoned investors, the dominant factor is leverage. More specifically, the cost and availability of credit. On an asset-to-asset basis, well-constructed share portfolios often outperform property over the long term.

However, once leverage is applied, property becomes comparatively attractive because investment property loans are significantly cheaper than margin loans or structured debt for equities. Property investment is fundamentally a credit-driven activity.

This is why shifts in APRA’s serviceability buffers, bank lending policies and interest rate exert vastly more influence on investor demand than disposal taxes.

A reduction in the CGT discount will not prompt large investors to sell. If anything, it will intensify the well-known lock-in effect: when the cost of exiting rises, turnover drops. Owners simply hold their assets longer, refinance to access equity, or use property as a store of wealth. This behaviour already dominates the upper end of the market and will only become more entrenched if selling becomes more expensive.

The investors most exposed to CGT changes are not the HNW cohort. It is the “mum and dad” landlords who rely on negative gearing to manage cash flow.

Many small-scale investors accept short-term losses because the CGT discount improves the long-term viability of holding the property. If the discount is reduced, the numbers no longer stack up. In high-cost states such as Victoria, the impact will be particularly acute. These investors will face two options: sell or raise rents to cover the shortfall.

Neither outcome supports housing affordability. Forced sales could put downward pressure on values, increasing the risk of negative equity for recent buyers, particularly those using schemes such as the Home Guarantee Scheme. Rent rises would add strain to an already tight rental market.

If the policy goal is to improve housing affordability, the focus should shift away from exit taxes and towards the factors that genuinely shape investor behaviour such as credit conditions and supply.

Changing the CGT discount will have minimal impact on sophisticated investors but may unintentionally increase rents, reduce market turnover, and push small-scale investors out, ultimately favouring the very investors the policy intends to constrain.