Australian households hold a far larger share of their wealth in residential land than comparable economies. For example, American households hold proportionally more than twice as much wealth in productive financial assets relative to residential land (non-productive asset) as Australians do. Residential property accounted for approximately 67.5 per cent of Australian net household wealth by March 2026.[1] The investment pool available for venture capital and clean technology commercialisation shrinks correspondingly. This negatively affects Australian innovation and productivity. Proposed tax changes to the capital gains discount and negative gearing by the Albanese government in the latest budget should help to redress this imbalance.

Property investment is predominantly an investment in land, a non-produced asset that generates no technological progress. The Australian residential market is worth $12.3 trillion,[2] superannuation is worth $4.5 trillion,[3] and the ASX is worth $3.2 trillion.[4] That is a 1.5:1 relationship of the residential market against ASX and super combined (almost 4:1 if we just compare ASX). The equivalent relationship in the United States is inverted: residential property sits at approximately 0.4 times the combined value of retirement savings and listed equities.

Investment in housing is favoured by tax settings, such as negative gearing, the absence of CGT on the principal place of residence, plus the CGT discount, which applies to all asset types.

But the principal reason that money invested in housing draws money away from other types of investment is leverage. That is to say, investment in property is typically financed by borrowing on a unique scale. A person with, say, $20,000 to invest, can typically take out a mortgage and invest around $100,000 in a property. That same person could only invest $20,000 in assets such as shares, unless they are one of a small number of sophisticated investors who is able to take out a “margin loan” to buy shares on credit. But a margin loan will generally fund only about 60 per cent of the purchase, carries higher interest rates, and exposes the borrower to margin calls if prices fall.

Housing finance faces none of these constraints: a standard home loan funds 80 to 90 per cent of the purchase, and with a guarantor or existing equity, lenders will finance up to 105 per cent, and in some cases 110 per cent, of the asset value, covering the full price plus stamp duty and transaction costs. We can subsequently use equity (unrealised price gains) as security to buy additional residential property, a facility with no mass-market equivalent for any other asset class. Given that house prices typically rise faster than mortgage interest, in part due to favourable tax settings, this is a very favourable investment scenario.

Thus a household dollar committed to property draws several more dollars of mortgage credit behind it. And banks accommodate that demand by shifting their balance sheets toward housing and away from business lending, which the prudential framework treats as riskier and more capital-intensive. The credit available to firms therefore contracts by more than the household's original dollar, and the resulting house price growth raises collateral values, drawing yet more lending toward property.

Econometric estimates of the relationship between housing and business investment flows show that before 1999, each additional dollar into housing was associated with 77 cents less business investment. After 1999, that figure rose to $1.56, meaning that, a dollar into housing now displaces more than a dollar of business investment.[5]

The crowding-out effect is economy-wide, suppressing business investment that drives productivity, job creation, and technological development across all sectors. Clean technology is the most consequential illustration of the problem: it is the sector where the cost of thin domestic capital is highest, where the gap between Australian research output and Australian commercial capture is widest, and where the consequences of continued underinvestment are most irreversible.

The implication for the clean energy transition is direct. The Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA) are the two principal federal bodies responsible for deploying public capital into Australia's clean energy transition. They invest on the explicit assumption that private co-investment will follow. That assumption is undermined when households and institutions that should supply matching capital are redirected into residential land because of preferential tax settings. Households carrying large mortgages divert discretionary savings into property rather than toward productive investment, and the commercialisation capital pool for clean technology stays persistently thin as a result.

The domestic capture of clean technology value depends critically on whether patient capital is available at the commercialisation stage. When it is not, Australian-invented technology migrates overseas. This is evidenced by the fact that Australia is home to less than 1 per cent of the world’s population, contributes approximately 3.4 per cent of the world's published research,[6] but files less than 2 per cent of global patent applications.[7]

The standard explanations for laggard clean technology investment are symptoms rather than causes:

• shallow venture capital markets
• risk-averse institutions
• cultural conservatism toward early-stage investment

The cause lies upstream: households have a safer and higher-yielding investment option in the form of residential land, which systematically redirects every extra dollar of savings away from productive investment.

Residential land/property is the most advantaged asset class. Investment in property combines four reinforcing advantages that, taken together, are unavailable for any other asset class available to Australian households.

• Losses during the holding period can be offset against labour income at the investor's full marginal rate.
• Eventual capital gains are taxed at half the investor’s relevant marginal tax rate (thanks to the 50 per cent CGT discount introduced in 1999).
• Residential property is uniquely accessible to high leverage through the mortgage market (a feature not accessible in a similar way/volume to non-property investments).
• The absence of a broad-based land value tax removes any holding cost on unimproved land, while stamp duty locks capital into existing property positions by making reallocation expensive.

The consequence of this systematic advantage is clear - approximately 2.4 million individual Australian taxpayers claimed deductions connected to investments in rental properties in 2021-22, outnumbering the country's 798,000 sole trader businesses by nearly three to one,[8] making buy-to-let property investment a more common expression of household entrepreneurship than actually running a business. Contrary to popular perception, this is not a phenomenon driven by large corporate landlords. Approximately 70 per cent of individual property investors own just one investment property, confirming that the tax distortion documented here is a mass household behaviour rather than a concentrated institutional one.[9]

Superannuation is frequently cited as the obvious source of patient domestic capital for long-term productive investment. Compulsory super contributions flow into funds whose liquidity requirements, driven by the retirement income drawdown architecture, push them toward listed assets over illiquid domestic venture positions. Households carrying large mortgages are also less likely to make voluntary superannuation contributions, diverting discretionary savings into property debt servicing rather than into the superannuation system where it might otherwise be deployed toward infrastructure, clean technology, or early-stage innovation. The result is a double constraint: the tax system suppresses the voluntary contributions that would expand super funds' capacity to take on illiquid domestic positions. At the same time, the drawdown architecture limits what they can do with the compulsory contributions that do flow.

Australia has genuine comparative advantages in the clean energy transition. The research base is globally competitive in solar photovoltaics, green hydrogen, and battery chemistry, and the institutional architecture through the CEFC, ARENA, and the Future Made in Australia agenda is more coherent than at any previous point. What it cannot do, on its own, is fill a bucket with a structural leak at the bottom. And the econometric evidence presented here suggests that the significance of this leak is missing in the usual housing debate. Every dollar the CEFC and ARENA deploy assumes private co-investment will follow, and when that co-investment fails to materialise because the tax systematically redirects the household and superannuation capital base, the leverage ratio falls, and the public dollar does considerably less work than it should.

Rebalancing the household investment decision calculus does not require households to become venture capitalists or to change how they fundamentally think about investment. The 2.4 million Australians currently claiming rental deductions are responding to a tax system that makes residential property the highest after-tax return available to them. Changes to the tax system will incentivise changes to investment behaviour. 

The fix does not require collapsing the housing market. It requires tax neutrality between asset classes: unwinding the remaining CGT preferencing on investment properties, replacing stamp duty with a broad-based land value tax, which several states are already moving toward, and extending equivalent incentive treatment to clean technology commercialisation investment. The ACT's gradual land tax transition demonstrates that reform can be executed without the market disruption its opponents predict.

Budget measures to partially unwind property investment tax concessions represent a step in the right direction, and the federal government has shown both the foresight and the resolve to begin addressing the extent to which investment in the residential market displaces business investment. Time (and data) will give us the true extent of the effect.

Ali Khan, August 2026

Dr Ali Khan has a PhD in Economics and Econometrics and has spent his career working across a wide spectrum of economic disciplines, from academic research through to senior economist roles across industry, government and the not-for-profit sector. His research and writing focus on applied econometrics, innovation, labour markets, and the intersection of tax policy, capital allocation and Australia's productivity and clean energy challenges. 

References

[1] Australian Bureau of Statistics, "Australian National Accounts: Finance and Wealth, March 2026," released June 25, 2026, https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-finance-and-wealth/latest-release

[2] Australian Bureau of Statistics, "Total Value of Dwellings Reaches $12 Trillion," media release, 10 March 2026, https://www.abs.gov.au/media-centre/media-releases/total-value-dwellings-reaches-12-trillion

[3] Australian Prudential Regulation Authority, "APRA Releases Superannuation Statistics for December 2025," media release, February 2026, https://www.apra.gov.au/news-and-publications/apra-releamultiplies,hatses-superannuation-statistics-for-december-2025

[4] CEIC Data, "Australia: Australian Stock Exchange: Market Capitalization," accessed June 2026, https://www.ceicdata.com/en/australia/australian-stock-exchange-market-capitalization

[5] OLS regression, ABS National Accounts 1993 Q2 to 2025 Q4 (N=131 quarterly observations). Function: private business investment as share of GDP (%), as a function of residential investment, cash rate, and household income growth. Data: ABS catalogue 5206002 (series A2304098T, A2304089R, A2304085F, A2716198R, A2304402X), seasonally adjusted chain volume measures; RBA Statistical Tables F1 and F01DHIST (cash rate); ABS catalogue 5206020 series A2302939L (household disposable income). Full data and Python estimation code available from the author on request.

[6] Australian Government Department of Industry, Science and Resources, Australia's National Science Statement 2024 (Canberra: Commonwealth of Australia, 2024), https://www.industry.gov.au/publications/national-science-statement-2024.

[7] WIPO, PCT Yearly Review 2025: Executive Summary (Geneva: WIPO, 2025), https://www.wipo.int/web-publications/pct-yearly-review-executive-summary-2025/en/pct-yearly-review-2025-executive-summary.html; IP Australia, Australian IP Report 2024 (Canberra: IP Australia, 2024), https://www.ipaustralia.gov.au/tools-and-research/professional-resources/data-research-and-reports/australian-ip-report-2024

[8]Australian Government Treasury, Tax Expenditures and Insights Statement 2023-24 (Canberra: Commonwealth of Australia, 2024), 34, 2023-24 Tax Expenditures and Insights Statement

[9] Reserve Bank of Australia, "Insights from New Data on Australian Housing Investors," RBA Bulletin (Sydney: Reserve Bank of Australia, May 2026), https://www.rba.gov.au/publications/bulletin/2026/may/insights-from-newthat -data-on-australian-housing-investors.html)