Owner occupier borrowers are better off than investors under the Australian taxation system, according to a leading centre-right think tank.
These results come from a research paper entitled Housing Investment – The Last Five Years
by the Australian Institute for Progress (AIP). The AIP is a Brisbane-based organisation that “promotes the classic rights – freedom of expression, freedom of association, property rights, freedom of worship, and freedom of markets”.
The AIP study examined figures from the Australian Bureau of Statistics (ABS) and modelled housing returns for both owner occupiers and investors from 2011 to 2016.
Analysis found that an average value residence purchased for $490,800 in 2011 with a 20% deposit and then sold for the average dwelling price of $631,400 in 2016 would bring an average rate of return of 13.54% for owner occupiers and between 8.17% and 8.78% for investors depending on the marginal tax rate.
“The startlingly better rate of return received by owner occupiers over investors indicates owner occupiers are not being outbid by investors because of the tax arrangements,” said AIP executive director Graham Young.
The report found that owner occupiers are at an advantage because of how rents shift compared to mortgage repayments over time.
“After a number of years of inflation in rents, the rent becomes less than the mortgage payments in most scenarios we modelled. At this stage, the owner occupier receives an effective tax benefit because what they save in rent is net of tax.”
This tax benefit is compounded by capital gains exemptions for owner occupiers, bringing even greater returns, the study found.
One factor contributing to housing affordability is the relative ease in which investors can use pre-existing equity as a deposit rather than having to save up from scratch in the same manner as an owner occupier.
Allowing first home buyers to use superannuation to supplement their savings was one way to solve this issue, Young said.
“Increasing access to savings for a deposit is the only measure likely to increase housing affordability for first home buyers without prejudicing the savings of other Australians by decreasing the price of housing.”
Other measures tackling supply, such as movements in interest rates, would also have an impact although these may have other undesirable side effects, Young said.
AIP research also found that Australians were disadvantaging themselves by putting money into superannuation over property.
“What this study shows … is that superannuation has been a relatively poor investment in the recent past, and investing their savings in their own home is the best investment an average Australian could have made, by a factor of almost 2.95 times.”
Labor’s suggestions for reforming negative gearing would not remove investors from the market either, the AIP noted, because a geared investment in housing still beats investment in super by up to 71% after tax under Labor’s proposed policies.
“For owner occupiers, under Labor or Coalition policies, the after-tax return on housing was up to 26.83%, while for investors the maximum after-tax return was 15.86% under the Coalition and 11.67% under Labor.
“The absolute best superannuation return over the same period was 10.8% (only available to employees of Goldman Sachs and JB Were) down to -0.3%. The median was 6.8%.”
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