“It would be a form of political suicide subject to one point,” said Mr Eslake, a critic of Australia’s tax incentives that encourage investment in residential property and drive up the price of housing
“You would then need to allow mortgage interest as a deduction, an expense of earning that income.”
This would give people even more cash to put into housing purchases, Mr Eslake said.
“It’s an incentive to borrow more,” he said. “That’s why people do negative gearing – imagine being able to do it on your own house.”
When it comes to residential property, Australia is just above the OECD average of 68 per cent, with 68.5 per cent of household wealth tied up in the owner-occupied and “secondary real estate” investment property, holiday homes and farmland.
However, it is second only to Luxembourg for average housing wealth in both types.
The OECD argues in favour of removing or capping mortgage interest relief for owner-occupied housing and says capital gains on secondary residential property – or investment properties – should be taxed.
But the Paris-based organisation says capping CGT exemptions for primary residences has the potential to reduce distortions and improve equality while also raising revenue, especially at a time of falling home ownership among younger people.
“Capital gains tax exemptions for the main residence reinforce intergenerational and geographical inequality, given that gains have been concentrated among older generations and specific geographical areas,” the report says.
“Older households are characterised by high homeownership rates and housing wealth and have enjoyed significant growth in property prices.”
The unprecedented gains in residential property values – which have outstripped inflation and wage growth – over the past three decades were due to historically low levels of interest rates and unlikely to be repeated, meaning future home owners will not reap the same benefit, it says.
“Homeownership rates are falling among younger generations, in part due to property value increases that have made it increasingly difficult to access the housing market,” the report says.
“Even if younger households are able to access the housing market, they may not experience the large gains of previous generations. Many countries have also witnessed stark differences in the regional distribution of capital gains, with households in large metropolitan areas benefitting from the most significant property price growth on already highly valued property.”
The report argues in favour of broad-based land taxes on real estate and the elimination of transaction-based taxes, such as stamp duty, saying it would increase efficiency in the housing market.
Tax incentives for energy-efficient housing renovations could also be better targeted to ensure that they reach low-income households, the report also says.
“This could contribute to greater emissions reductions and enhance the equity of tax incentive schemes,” it says.