Capital Gains Tax and housing

I support a comprehensive capital gains tax (so long as other taxes are reduced to compensate) as the best tax system is broad based, low rate and few exemptions.

But I have always been suspicious of the claims that a CGT will have a big impact on house prices. Certainly Australia has a full CGT and they have similiar price inflation.

This exchange from Q+A was interesting:

Jonno Ingerson told Q+A that the Government’s bright line test doesn’t seem to be deterring speculators.

CORIN   Well, that’s interesting too, because that suggests, say, that the bright line test that the Government brought in, which was to say, ‘You sell within two years, that’s a clear line there. You have to pay your tax on your capital gain,’ that’s not deterring people.

 JONNO No, and if you look at the people that that was targeted at, which would be the speculators, if you like, that are driving the market, turning it over quickly, a lot of them were doing that as a business anyway.

 CORIN   And paying tax, presumably.

 JONNO And paying tax. Quite happy for the IRD, sure, yeah, ‘I bought and sold, and I’m paying you my big block of tax.’ The people it was aimed at were those that were skirting around the system. Yeah, it’s knocked a tiny number of those out, but—

 CORIN   Yeah, but that suggests they’re making such a decent profit that they’re quite happy to hand over it.

 JONNO Quite happy. Make 100,000, there’s your 50,000, 30,000, whatever it is and keep going.

If you make $100,000 off a house purchase and sale, then its a great investment whether or not your profit is $100,000 (untaxed) or $67,000) taxed.  A CGT will have some impact around the margins, but when demand is so much greater than supply, the impact is small.

Until the land supply issue is fixed, house prices will continue to increase.