Discard negative gearing to trim demand: Institute

Abolishing negative gearing can help reduce housing demand, which contributes to rising home prices, says Grattan Institute

Discard negative gearing to trim demand: Institute



Building extra 50,000 homes a year can improve housing affordability – and so can reducing housing demand, which can be done by cutting the capital gains tax discount to 25%, getting rid of negative gearing, and including owner-occupied housing in the Age Pension assets test, said Grattan Institute.

The public policy think tank said in a report released last Sunday that building extra 50,000 homes a year for a decade could leave Australian house prices 5%-20% lower and allay rising public anxiety about affordability.

It called on state governments to fix planning rules to allow more homes to be built in inner and middle-ring suburbs of major cities, and to do away with council planning approval to allow more small-scale urban infill projects.

“State governments should also allow denser development ‘as of right’ along key transport corridors. They should swap stamp duties for general property taxes,” it said.

The touchy subject of abolishing negative gearing figured among Grattan Institute’s recommendations for reducing the strong housing demand, which it said has contributed to rising home prices. It suggested limiting negative gearing by isolating wage and salary income, so that investment losses can only be written off against other investment income.

Grattan Institute said the current tax settings – particularly the capital gains tax discount and negative gearing arrangements – encourage investment in housing. It noted that the relatively light capital gains taxation has further incentivised investors to negatively gear property.

“Investors can borrow to invest and deduct the interest costs against other income at their marginal rate. The capital gains are then only taxed at half their marginal rate. Since the introduction of the CGT discount, landlords have collectively paid more in interest costs than they have received in rents.”

The think tank pointed out that almost all the net additional investors in property have been negatively geared – with about 1.3 million landlords reporting collective losses of $11 billion in 2014-2015.

“It took neglectful governments two decades to create the current housing affordability mess. They preferred the easy choices that merely appear to address the problem,” said Grattan CEO John Daley.

Daley acknowledged that the politics of reform are fraught, given that most Australian voters own a home or an investment property and generally mistrust any change that might affect the value of their properties.

“But if governments keep pretending there are easy answers, housing affordability will just get worse. Older people will not be able to downsize in the suburb where they live, and our children won’t be able to buy their own home,” he said.


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