Changes target negative gearing rort, but housing still unaffordable

Negative gearing saves the rich billions in tax each year. It allows those who can afford investment properties to reduce their tax.

It’s good Labor has announced that it would end negative gearing for existing properties after 2017. Combined with a reduction in the tax discount on profits on sales of investment housing, $32 billion of tax will be bought into government coffers over the next decade.

In 2013-2014, 60 per cent of investment properties made a loss. This means rent income was less than the interest on the mortgage, costs for rates and utilities and other expenses.

Under negative gearing that loss is covered by Australian taxpayers as a deduction on the owner’s income tax bill. The average loss was roughly $10,000. So someone earning $170,000 would only pay tax on $160,000. In 2013-14, $11 billion in losses were claimed through negative gearing.

Turnbull has tried to paint negative gearing as something essential to average people by noting that the majority of those who access it have taxable earnings below $80,000.

This is pure trickery. Firstly, while average full-time earnings approach this amount, most Australians live on less than $50,000.

Secondly, stressing “taxable” income already factors in the effect of negative gearing. You could earn $110,000, take $30,000 off it through negative gearing losses (the average reduction for surgeons) and have a taxable income below $80,000. The Grattan Institute have found that half of the tax saved goes to the richest 10 per cent.

Labor will allow negative gearing on newly-built properties only.

In 1999 Howard’s Treasurer, Peter Costello, changed the tax paid on the profits made from selling an investment property (Capital Gains Tax) so that half the profit is tax-free. This costs taxpayers $6 billion every year. Labor has pledged to reduce the tax-free portion rental properties (purchased after 1 July 2017) from 50 per cent to 25 per cent. They should go further and tax capital gains just like our wages and other income is taxed—in full.

The Liberals claim that Labor’s policy will crash the housing market. Two-thirds of Australians either own their home outright or have a mortgage. This means many people are susceptible to fears that their house might devalue. With the government also claiming rents will increase under Labor’s plan, renters are also being told they will lose out.

Impacts

Both claims are overblown. When Hawke and Keating suspended negative gearing from 1985-1987 rents rose in Perth and Sydney, but they either fell or remained constant in all other cities.

The ratio of Australian house prices to incomes in Australian cities are now some of the world’s highest, and prices in Sydney and Melbourne have grown by nearly 13 per cent in the last year. Negative gearing has helped push prices up by encouraging more investors to buy a second, third or fourth home, competing with people trying to buy a home to live in.

Housing costs are increasingly unaffordable.

To cope with the mortgage on a median house in Sydney you need to earn $106,000 a year—more if you have children.

The growing size of deposits needed for a mortgage is locking younger people out of homeownership, even if they have a reasonable wage. Those without family wealth struggle to pay the deposit.

Debt is also a major problem. Interest-rates only have to increase a couple of points from current historic lows for many mortgages to become unmanageable.

Last year for the first time there were more people buying housing as an investment than to live in themselves.

But negative gearing is not the key driver of housing investment. Globally huge amounts of capital have flowed into housing because of the lack of profitability in productive sectors. Low interest-rates since the GFC make credit virtually free. With demand in some capital cities outstripping supply, the rise and rise of Australia’s housing market is taken by investors as an article of faith.

For these reasons Labor’s negative gearing changes are unlikely to significantly reduce house prices.

Modelling by the McKell Institute shows price growth would continue, slowing from 3.09 per cent to 2.6 per cent annually. Labor wants to promote its changes as aiding affordability. But a 0.5 per cent reduction in price growth is little help.

Housing is too important to be left to the market. Public and social housing has been decimated since the 1980s. This must be reversed.

Rather than attempting to induce investors to build new houses, Labor should pledge to build new public housing stock itself and invest in maintaining the existing supply.

This would not only provide downward pressure on property prices, it would also ensure that good quality housing is provided to those that need it.

By Jean Parker

Magazine

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