Budget Night: What's going to happen to negative gearing?

by Calida Smylie13 May 2014
Real estate associations and economists sit on different sides of the fence on the rumours the government will reform Australia’s negative gearing rules in the 2014 Budget, announced tonight.

There have been reports the government will amend the controversial rules, by grandfathering arrangements for existing investors and only allowing negative gearing on newly constructed dwellings.

Both the Housing Industry Association and the Real Estate Institute of Australia (REIA) believe any change to negative gearing would impact on the supply of housing and the level of rents in an already tight rental market.
 
“To amend the current negative gearing provisions for housing would be treating real estate differently to other asset classes, create a distortion on the investment landscape and result in a resource misallocation,” REIA president Peter Bushby said.
 
“The view that negative gearing is for wealthy investors is a myth. ATO data shows fewer than 80% of the total individual taxpayers that are claiming a tax deduction for property earn less than $80,000 a year.”
 
He believes a change to negative gearing could result in rents rising by more than 4%.

RP Data’s Cameron Kusher said negative gearing is in place to encourage developers to build new rental accommodation and private individuals to act as landlord for those who are not in a position to own their own home.

“While it would make sense to apply negative gearing only to newly constructed properties, politically it would likely be unpopular. Furthermore, if negative gearing was to be removed the government would likely have to play more of a role in constructing new homes and managing a portfolio of properties. 

“On balance, they probably see that foregoing almost $8 billion in taxation revenue is more cost effective than developing and managing a greater proportion of new housing stock,” Kusher said.

But according to Grattan Institute research, quarantining negative gearing losses would save the budget around $4 billion per year initially and fall to a saving of around $2 billion per year over the longer term.

Its report also showed that negative gearing was not producing much-needed new affordable housing.

Economist Leith van Onselen has argued many times on his blog against retaining negative gearing, especially on the grounds of rental supply.

“A large scale sell-off by investors would be met by purchases from renters (i.e. first home buyers). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged,” he said.

Property Asset Planning managing director Brian Chant would also support changes to end negative gearing on established property and allow it only for new dwellings.
 
“In the last 25 years negative gearing has done little to boost supply of rental accommodation or improve affordability.
 
“Not only would proposed changes to negative gearing improve the budget’s bottom line, stimulate the building industry and address the shortage of rental accommodation where it’s needed it provides a great vehicle for people wanting to become self-sufficient in their retirement through investing in brand new [property].”

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COMMENTS

  • by Common Cents (not an Economist) 13/05/2014 10:05:51 AM

    Leith van Onselen thinks that removing Negative Gearing will allow Renters to become Buyers. Great Theory, shame about the practice.

    Sorry Leith, but whilst your theory sounds like a fair assumption, you're missing one vital part of the equation - the finance to purchase a property!

    Unfortunately, the reason most renters remain renters is that they do not have the capacity to pay rent and save a deposit. So regardless of the availability of property (cheap or otherwise), unless the current Lenders Mortgage Insurance Credit Policy is substantially revised to remove the genuine savings requirement and/or to increase the current maximum Loan to Value Ratio, the renters will still remain renters.

    I also forgot to mention, that one of the major barriers to entry for First Home Buyers is Stamp Duty. Unless a First Home Buyer purchases a new home, they miss out on the current First Home Owner incentives. Therefore, unless the State Governments totally abolish Stamp Duty - which is the single biggest deterrent to purchasing established property, then once again, the majority of renters will remain exactly that, renters! (In my experience, most First Home Buyers do not want to live out on the fringes of suburbia where the affordable housing supply tends to be.)

    So Leith, if the Investors sell their Rental Property as you assume they will, what is going to happen to all the renters unable to finance the purchase of a home once the Investors have sold up and they have no place to live?

    Hmmm, the Government would have to step in I guess! Oh and of course all levels of Government are well equipped to cope with the demand aren't they? Oh, and it wouldn't cost the Government's anything to provide all that housing would it?

  • by Coast Broker 13/05/2014 10:49:57 AM

    If the number claiming a tax deduction is less than 80% of tax payers earning less than $80K pa, then what is the figure? !!!!

    True - any change would treat property investment as different to other asset classes because absolutely, it is different. It's where people live.

    Let the market decide the outcome without the tax distortion.




  • by Common Cents (not an Economist) 13/05/2014 4:24:01 PM

    Leith van Onselen thinks that removing Negative Gearing will allow Renters to become Buyers. Great Theory, shame about the practice.

    Sorry Leith, but whilst your theory sounds like a fair assumption, you're missing one vital part of the equation - the finance to purchase a property!

    Unfortunately, the reason most renters remain renters is that they do not have the capacity to pay rent and save a deposit. So regardless of the availability of property (cheap or otherwise), unless the current Lenders Mortgage Insurance Credit Policy is substantially revised to remove the genuine savings requirement and/or to increase the current maximum Loan to Value Ratio, the renters will still remain renters.

    I also forgot to mention, that one of the major barriers to entry for First Home Buyers is Stamp Duty. Unless a First Home Buyer purchases a new home, they miss out on the current First Home Owner incentives. Therefore, unless the State Governments totally abolish Stamp Duty - which is the single biggest deterrent to purchasing established property, then once again, the majority of renters will remain exactly that, renters! (In my experience, most First Home Buyers do not want to live out on the fringes of suburbia where the affordable housing supply tends to be.)

    So Leith, if the Investors sell their Rental Property as you assume they will, what is going to happen to all the renters unable to finance the purchase of a home once the Investors have sold up and they have no place to live?

    Hmmm, the Government would have to step in I guess! Oh and of course all levels of Government are well equipped to cope with the demand aren't they? Oh, and it wouldn't cost the Government's anything to provide all that housing would it?