A typical Aussie home in Melbourne, Australia. Photo / 123rf
A capital gains tax was introduced in Australia over three decades ago and since then house prices have roared out of control.
But does this mean that capital gains taxes can't help control house prices?
Not necessarily. It depends on why they were introduced and how they were designed.
As New Zealanders contemplate casting their vote in a couple of weeks' time and voting for a party that may or may not introduce a capital gains tax (perhaps things are clearer on the other side of the Tasman than they are from this distance) there are some lessons from Australia.
The capital gains tax was introduced in September 1985 by the Labor government of Bob Hawke and Paul Keating.
In 1985, the median Sydney house price was just A$92,000 ($102,000), compared with A$1.1 million in 2016.
But before we jump to the conclusion that capital gains taxes can't limit property prices, we should look a few of the reasons that it hasn't done so in Australia.
The first reason is that it was never intended to limit house price growth. In Australia, the CGT was intended to raise money for the Government and to ensure that those people who were lucky enough to have investable assets paid tax on those gains, in the same way others pay tax on their wages.
To maximise the amount of money raised, the tax was applied to any investments, be they houses, other property, shares, bonds, works of art, or whatever. Thus it did nothing to divert investments away from property.
With the introduction of the tax, some people might have decided to instead spend their money on something else or give it to their children instead of investing.
But for the majority who decided they would continue to make investments, their decisions about what to invest in where unchanged. There was nothing to steer them away from buying a house or flat and towards putting their cash into shares or a business instead.
A capital gains tax that applied only to housing, or was higher for investment property than for other assets would have made investors think twice before they rushed headlong into housing.
The capital gains tax wasn't initially fuelling the surge in house prices.
But that changed in September 1999, when John Howard's government changed the way the capital gains tax was calculated. At this point the median Sydney house price was A$289,730.
Previously investors had to pay tax on all of the capital gains an asset made, minus any gains that had been eaten away by inflation. Howard did away with the inflation adjustment, and instead halved the amount of capital gains tax investors would have to pay.
This was one of many generous financial benefits Howard handed to his core constituency of middle class voters. The result is many of those voters' adult children now can't afford their own homes.
By 2004, house prices had become sufficiently concerning to justify an inquiry into first home ownership by the Productivity Commission.
The commission found the cut in the capital gains tax rate "heightened the attraction for individuals of investing in property in a period of strong house price growth and low inflation".
In its submission to the inquiry, the Reserve Bank of Australia explained how the capital gains tax interacts with other tax concessions for property to actually encourage investors to buy up houses.
Under tax breaks known as negative gearing, property investors get a tax deduction if their interest bill and their maintenance costs amount to more than the property brings in in rent. Many investors ensure their property runs at a loss to maximise their deductions and lower their overall tax bill.
"In most countries the earning of rental income is seen as the most important reason for investing in rental properties," the RBA wrote. "This seems to stand in contrast to the situation in Australia where properties are commonly marketed on the assumption that they do not earn positive taxable income for a considerable period."
What this means is that investors are prepared to pay crazy prices for houses. They don't look at the weekly rental income and say that it's too low to justify the price of the house. They just jump in and snap up the house in the expectation that the price will keep rising, that they'll get generous tax concessions along the way, and when it comes time to sell the house, they won't have to pay too much tax on their gains.
That was back in 2004, when the median Sydney house price had climbed was A$552,000, less than half of what it was now.
None of this proves that a capital gains tax can't help keep house prices down. But what it does show is that governments have to be very deliberate about what they want the tax to achieve and how they design it.