Two words are continually circling around the property sphere: negative gearing. It’s a friend to property investors but a foe to first-home buyers; the home ownership rate among 25-34-year-olds has reportedly dipped below half.
According to a report by the Grattan Institute, negative gearing and the capital gains discount provide residential property investors with nearly $7 billion a year, or $4500 on average for each property investor. The report suggests that the current government welfare and tax policies benefit wealthy home owners, leaving young renters and first-home buyers disadvantaged. We asked property institutions and experts to weigh in …
Shane Oliver, head of investment strategy and chief economist, AMP Capital:
It seems every time the Australian residential property market takes off, calls appear for negative gearing on investment property to be restricted or abolished. But is it really the reason Australian housing is so expensive? Yes, it does seem investors have a bit of an advantage over first-home buyers and yes, first-home buyers seem to be missing in action right now.
But negative gearing is not the real problem. Australia is not alone in providing some form of tax assistance to home owners, as most comparable countries do. Americans can even deduct interest on the family home from their taxable income, and yet our house price-to-income ratios are much higher.
Removing or curtailing negative gearing could even make the situation worse by reducing the supply of rental accommodation at a time when rental yields are hardly attractive for investors and could cause other distortions in the economy because negative gearing would still be available on other investments.
The real problem is a lack of supply. In a well-functioning market when demand goes up, prices rise and this eventually is met with increased supply. This has not been happening in the Australian housing market. We have had a world-beating surge in house prices relative to incomes since the mid-1990s and yet building approvals are in the same range they have been in since 1990. What we really need to do is reform the supply of housing — release land for development faster, relax (within reason) development controls and develop a long term plan to decentralise away from our major cities.
Steve Keen, professor of economics and finance, University of Western Sydney:
Negative gearing should be grandfathered out of existence: those who’ve already bought an investment property would continue to be eligible, but it should not be available in future.
The simplest reason is that it has failed in its one supposed policy objective: to enhance the supply of rental properties. What it has instead done is encourage individuals to speculate on the prices of existing properties. It has thus driven up house prices above what they would be if the government weren’t meddling in the property market, while doing precious little to increase the availability of rental properties by stimulating new construction. Borrowing by investors for building construction has fallen from 60% of investor loans to below 10% over the last three decades — a clear sign of a failed policy.
Terry Ryder, founder of Hotspotting.com.au:
There’s no reason for it to be changed, it’s a system in place for clear reasons, for valid reasons, and it works. The one and only time that a government in Australia decided to scrap it precipitated a disaster in the rental market, and they had to bring it back very quickly. That happened in the era that Bob Hawke was prime minister and Paul Keating was treasurer.
Particularly in our capital cities, negative gearing is necessary for the viability of people buying investment properties. Without it, there would be a sharp reduction in the number of people who a buying properties in the capital cities because it’s very, very hard in our major cities to buy an investment property that’s positive cash flow. The vast majority are cash flow-negative, and without the tax benefit, it’s not a viable investment, therefore the pool of rental properties that are needed for those who rent, would dry up very quickly.
Peter Bushby, president of the Real Estate Insitute of Australia:
REIA has always supported negative gearing because it helps in the provision of rental accommodation. Negative gearing for property investment is complementary to the goals of the government’s Housing Affordability Fund in addressing the supply of rental accommodation.
To remove it would show that we haven’t learnt anything from history. When negative gearing was abolished in 1985 it had disastrous consequences for the property market and for people trying to rent. Rents rose 37% across Australia and by 57% in Sydney. Thankfully, negative gearing was reinstated in 1987.
The myth that negative gearing is a plaything of the wealthy also needs to dispelled. The majority of taxpayers with a negatively geared property earn less than $80,000 a year. With the new government, expectations that industry will be involved in finding workable solutions to these old issues are high.
*This article was originally published at Property Observer