In this blog, Validum Institute’s Director and Real Estate Trainer Victor Pisanos uses his industry insights to explain the key issues, as argued by both sides of the fence, minus the emotional buzzwords.
From renters through to developers, it seems everyone has something to say about the current negative gearing plans to:
This ALP plan, which could affect every Australian, is said to improve economic growth, housing affordability and equality.
But when you combine extremely complex economic concepts with the emotive issue of home ownership, the result is a vicious, largely uninformed debate wherein investors are positioned as greedy rich people using the working class’ taxes to fund their investments and non-owners are positioned as lazy renters who can’t be bothered with the hard work home ownership demands.
Those who are against negative gearing argue that it drives up housing prices. Their reasoning is as follows:
Essentially, negative gearing allows high-income earners to outbid first home buyers then use the losses they make on these properties as a tax offset, which bumps them into a lower tax bracket. This potentially results in negative gearing investors receiving smaller tax bills than they would have incurred if they had no investment property.
Those who don’t believe that negative gearing drives up housing prices point to the fact that two-thirds purchases are made by owner-occupiers, not those looking to purchase purely for investment purposes.
They argue investors simply don’t make up enough of the market to be responsible for the large rises in housing prices we are currently experiencing, and that other factors like interest rates and supply and demand are to blame.
Furthermore, those in favour of negative gearing argue that investors were responsible for the building of 58,000 new dwellings in Australia last year, which helped adjust the balance between supply and demand and should ultimately push housing prices down.
According to Tax Office data prepared by the Grattan Institute, the top 10% of income earners (before their property losses are deducted) receive 50% of the negative gearing tax deductions and 75% of the concessionally taxed capital gains from property.
The real life implications of this statistic are highlighted by the fact that nurses are 16 times less likely to benefit from the negative gearing system than their higher paid surgeon counterparts, yet they could be taxed at the same rate once the surgeon’s losses are deducted from his or her taxable income.
Critics of the negative gearing system also argue that the government should be investing the billions of dollars spent on negatively geared houses into other areas like business and industry, which could be more beneficial to the nation’s economy.
The above figures seem startling, but only because they are measured in absolute dollar values, not as a proportion of income benefits.
When the benefits are calculated as a proportion of the recipient’s actual income, lower income earners actually gain the most relative benefit from negative gearing.
Negative gearing is a way that the government insulates investors from financial losses, and this results in investors taking greater risks than they otherwise would.
These greater risks inflate property prices and add a level of volatility to the market, which makes the nation’s economy more susceptible to external shocks.
Traditionally, taxes have always been applied to the net not gross income, no matter what type of business or investment is being taxed. Many argue that housing should be no different.
Taking loss deductibility off the table only incentivises tax avoidance and reduces the motivation to invest in riskier assets and enterprises (i.e. the new houses Australia so desperately needs).
Another notable point is that investors who use negative gearing to construct new houses create jobs in the construction sector as well as the real estate industry, and that’s great for the economy.
If negative gearing is restricted to only new constructions and no longer offered on the purchase of existing dwellings, then rent will theoretically increase in two ways.
First, landlords making a loss that the government won’t subsidise will pass this cost on to tenants.
Second, with the incentive of tax deductions for loss-making existing dwellings removed, fewer investors may enter the market. This could cause further supply and demand imbalances, increased rents and property prices, and less chance for renters to enter the buying sphere.
It is sometimes argued that abandonment of negative gearing for a brief period in the 80’s resulted in painful rent hikes in Sydney.
Some say that without proper modelling there’s no way to tell what the effect of tax changes will be on rental prices.
However, most economists agree that scrapping negative gearing wasn’t the cause of Sydney’s rental rises. They argue that Sydney was the only city to experience these rises, despite the policy being rolled out across the nation, and that Sydney’s rises were due to localised supply and demand issues.
Furthermore, if rents do increase, these rises might be an additional financial incentive for renters to buy.
When comparing Australia’s capital gains taxation levels to the capital gains taxation demanded by other countries, our nation comes out looking very generous.
This generosity may be ill-informed, however, as many other developed countries have higher capital gains taxes than Australia yet their investment in property is still flourishing.
Making purchasers pay more capital gains tax when they already have to pay stamp duty, land tax, ES levy, GST and duty on loans could be a major disincentive to invest in property.
Capital gains tax deductions help the rate of tax on capital stay lower than the rate of tax on income and stop investors from effectively being double taxed – once when they earn the money and once again when they invest it.
Capital gains discounts are also important for protecting capital gains from inflation. Property investments are much more susceptible to inflation costs than regular income is.
The one problem that both sides of the negative gearing divide agree needs to be addressed is Australia’s chronic housing undersupply.
In 2013 the National Housing Supply Council estimated that Australia had a housing deficit of roughly 228,000 dwellings. Since then, the population has continued to grow at a rate faster than housing construction, tightening the pressure on housing prices even more.
A possible solution to this problem is reforming the way the government deals with planning permissions. Planning permissions, it is argued, place far greater restraints on new housing supply than any negative gearing policies.