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Patrick Commins

Capital gains tax discount not to blame for high house prices, former PC boss says

Michael Brennan, the CEO of the e61 Institute, says it would be “brave” to say that the introduction of the 50% capital gains tax discount in 1999 played a major role in the massive boom in house prices since the turn of the century.

Instead, the “locking in of expectations that interest rates would be permanently lower” meant buyers were prepared to pay more for a range of assets, including property. That had a “significant effect” on the housing market, Brennan told a parliamentary committee looking at the CGT.

There was also a big rise in incomes from 2003 as China’s rapid industrialisation sparked a boom in the demand for iron ore. “We had significant population growth at the time; that’s also something that contributed to the run-up in housing prices a bit in that period,” he said.

Brennan doesn’t believe that reforms to the CGT should be viewed through the lenses of housing affordability or intergenerational fairness, despite the fact that much of the talk through the three days of hearings has been on this topic. Instead, it should be about the “twin principles of horizontal and vertical equity”.

Horizontal equity argument is the idea you want to have people with similar incomes taxed similarly. And vertical equity in the sense we have a belief in progressivity: that those on higher incomes make a higher proportionate contribution to revenue than those on lower incomes.

His previous evidence was that the CGT discount in its current form fails on both these counts.