A carefully crafted proposal by Labor to curb negative gearing concessions to investment property owners gained wide acceptance in the lead-up to the last election 2 July 2016 won narrowly by the Coalition.
I made a contribution to the debate then in the following article:
18 months later, it is likely that there will be another election for the 46th parliament of Australia called sometime between August 2018 and May 2019. Not surprisingly Labor is calling the government to account for ignoring Treasury advice that contradicted Coalition Party election spin that the measure would risk a collapse in housing prices.
Adding weight to Labor’s arguments has been an economic research paper on Negative Gearing presented by academics from the University of Melbourne Economics Department, Yunho Cho, Shuyun Li and Lawrence Uren, at a Reserve Bank of Australia Symposium on the November 17, 2017. It is too highly technical to be understandable by most. Furthermore, the authors state that the 55 page document is preliminary and incomplete, and ask that it not be cited. It suggests a welfare gain of 1.5% for the Australian Economy by eliminating negative gearing, and benefits to renters and owner-occupiers, at the expense of landlords, especially those who are young and on high incomes.
Federal Financial Services Minister Kelly O’Dwyer has pointed out the inconsistency of arguing that houses would become significantly more affordable, but house prices would be little impacted by abolishing negative gearing.
Despite this, Labor’s policy-makers are mindful of how rises in house prices especially in Sydney and Melbourne, have far outstripped the consumer price index increase over the past 30 years, creating in some locations, what can be fairly described as a dangerous property “bubble”.
They consider curtailing investors’ tax concession advantages in property ownership (about one third of the property market) compared with owner occupiers (two-thirds of the market) to be a responsible revenue raising measure with the fringe benefit of diverting wealth to the less affluent. But will the issue be a vote winner for Labor at the next election? Voters must judge how effective the changes are likely to be, and whether or not they will be advantaged or disadvantaged by them.
In the recent debate, property investors have often been unfairly portrayed as having exploited their tax-breaks. Some undoubtedly have, through interest-only borrowings that maximize their tax deductions but I understand that the ATO has restricted such loans, and I would applaud measures that place reasonable limitations on negative gearing.
Important points which should be made in defence of property investors:
- property investment for rental income, provides housing for those unable to afford home ownership, reducing the burden on the government.
- investors have substantial overhead costs, and it may be several years before their investment becomes profitable from the rental income they receive.
- although owner-occupiers receive no tax break from their loan, they receive an immediate financial benefit from not having to pay rent.
- non investors may be envious of the present 50% reduction in tax on property investment capital gains, but owner-occupiers have no capital gain obligation at all, even on properties in excess of $1 million.
- it is probable that the absence of any capital gains tax on owner-occupier homes is an incentive to speculative property trading in prestige areas of Sydney and Melbourne. In this market it is likely that fewer homes would be purchased for long-term rental, since they could be damaged by careless tenants.
Whether abolition of negative gearing on existing houses in combination with an increase of 25% from 50 to 75% in capital gain liability for property investors proves a vote winner will depend on how voters, nervous when governments adjust economic levers, perceive the changes as helping or damaging their financial position.
- The government is likely to be a clear winner to the tune of about A$2 billion in taxation revenue.
- Property investors will have the ability to mitigate their cost pressures by selling before the increase in capital gains tax comes into effect, and prior to significant adverse effect on house prices; increasing nominal rents; passing on some costs as additional rental obligations; and defaulting or delaying repair and maintenance work.
- First home buyers may be able to buy more cheaply, but risk buying into a falling market.
- Existing housing markets are likely to soften, if there are fewer property investor buyers willing to accept diminished returns from higher capital gains taxation and the loss of tax concessions.
- Once again it is likely to be those who are less well-off and dependent on rental accommodation who will be most impacted if rentals rise. This is likely from past experience since in the two years 1985-7 of no negative gearing, nominal rents nationally rose by over 25%. They increased in every capital city, and even after deducting the consumer price index to take into account the high inflation rate, they increased in both Sydney and Perth.
I am not an economist and make no claim to be an authority on the subject of negative gearing. I write as a consumer wishing to express an opinion based on my own reading, for the benefit of those who might wish to better understand the implications.