Canning negative gearing could cause 'havoc', says Aussie chief

by Julia Corderoy09 Oct 2014
As the debate continues over negative gearing, one industry stalwart has said that the unintended consequences of scrapping negative gearing could be “quite horrific” on the housing market. 

Aussie Home Loans chief John Symond told Australian Broker that killing off negative gearing will cause more supply problems.

“If negative gearing is hit on the head, it will exacerbate the already housing supply shortage in the market. There will be fewer developers inclined to develop for the fear that there will be less buyers. 

“It will also put more pressure on the rentals market because there will be less properties available for rent. As a result, it will force prices up – the laws of supply and demand will play a strong hand in pushing housing prices if negative gearing is abandoned.”

Saul Eslake, chief economist at Bank of America Merrill Lynch, has called on the government to scrap negative gearing or risk the continuing distortion of the housing market which is crowded with investors.

“People ask why do Australians invest so much in property and my answer is because the tax system almost says you're a mug if you don't. In the last financial year, investors borrowed $115 billion and owner-occupiers borrowed $108 billion,” he told the ABC.

“So investors are a bigger share of the market for established dwellings now than owner-occupiers are.”

Symond says that negative gearing isn’t to blame for the ‘unbalance’ in the market – where there are low levels of first home buyer activity compared to high levels of investor activity.

“First home buyer activity is low because interest rates are so low, which means there is going to be more competition in the market and they are going to have to compete with more and more investors.

“I saw a recent statistic showing 80% of investors in housing are just PAYG everyday mum and dad workers just trying to invest for their superannuation in the low rate environment to set themselves up for later years.”

However, although Symond doesn’t believe that negative gearing should be canned, he says there may be scope for revising the rules.

“It would take a brave government to hit negative gearing on the head, but there could be an argument that negative gearing can be tweaked. There could be a robust argument for putting a ceiling limit on negative gearing or restrict it to certain borrowers, but not for scrapping it altogether. That would cause havoc in the housing market going forward,” he told Australian Broker.

 

COMMENTS

  • by Allan Faint 9/10/2014 9:59:19 AM

    once upon a time home loan interest was tax deductable for the owner occupier. Maybe a silly idea but why not go that way and help people buy rather than think of ways to make it difficult.

  • by Saul Eslake 9/10/2014 10:06:01 AM

    John Symonds has made an enormous contribution to the mortgage and housing markets, and I respect him greatly for that. But I respectfully disagree with what he says here. The RBA's Financial Stability Review shows that, far from 'negative gearing' being largely the province of 'mum and dad' investors, some 60% of the debt owed by property investors is owed by the wealthiest 20% of households. He suirely can't have meant to say that "first time buyer activity is low because interest rates are so low" - that would imply that the way to help first-home buyers is to raise interest rates! 'Negative gearing' doesn't do anything to boost the supply of housing because 93% of investors buy established properties, as opposed to 70-75% of of owner-occupiers. 'Negative gearing' allows those investors to push up the price of the properties that owner-occupiers are trying to buy, with what amounts to a 49% subsidy from other taxpayers.

    I'm actually NOT advocating that 'negative gearing' be taken away from those who already have it (and who undertook their investments in good faith under the law as it now stands). What I am saying is that it should be henceforth denied to any new investments. That would be a much more effective way of dealing with the 'unbalanced' market that the RBA has identified than either raising interest rates or untried and possibly ineffective 'macro-prudential' measures, without hurting anyone who isn't a cause of the 'imbalance'.

  • by Pete 9/10/2014 11:13:59 AM

    Negative gearing was scrapped many years ago i think in the keating years.It was such a disaster & caused a huge shortgage in the housing market because investors stopped buying & builders stopped building it actually forced prices up & other major ramifications that i cant recall. Essentiaally it was such a disaster it was brought back in only 6 months later