Negative gearing - is it positive policy? Craig Turnbull

Negative gearing - is it positive policy? Craig Turnbull
Negative gearing - is it positive policy? Craig Turnbull

GUEST OBSERVER

All the property news  has focused on the pronouncement that Labor, if elected, will take away “negative gearing” for established property, leaving the tax incentive only for new properties.

Previously I considered it might be worth considering as just such a policy as it would give a shot in the arm for the housing industry, which has helped Australia avoid a recession since the mining construction boom ended. Since then, I have thought long about the issue and now believe that it would be poor policy indeed.

Some of you might be thinking that Mr. Shorten’s announcement would only matter if Labor got elected. Although that eventuality doesn’t look likely if an election were called right now, the Turnbull Government has been suspiciously quiet on the matter. I think they are assessing the media fallout of what Sir Humphrey Applebee may refer to as a “courageous” policy put forward by Mr. Shorten.

I say “courageous” because the last time negative gearing was stopped was in 1985 by the Labor government of Messrs. Hawke & Keating.

It was re-introduced just 18 months later.

The Government quickly realized that rather than raise money, it would cost them. In some cities, rents rose dramatically, but the telling point was that wait lists for government housing across the country expanded dramatically. The reality was that it was much cheaper to offer tax incentives to private landlords to invest in rental housing than it was for the government to build more public housing.

Nothing has changed.

Mr. Shorten’s team estimate that axing the incentive for established homes would only raise about $500M over four years. That would probably be enough to pay for about 1,000 new houses. I submit that many more than 1,000 investors would leave the property rental market and government housing lists would blow out by much more.

For those of you wondering what the fuss is all about or perhaps wondering what this “negative gearing” is, the next paragraph will assist.

Gearing is another word for borrowing or leverage. If you have gearing on your investment, it just means that you are using some borrowed funds – other people’s money to allow you to buy and own an investment. Negative gearing occurs when the income earned from the investment is less than the interest payments & other costs associated with owning that investment. If a loss occurs, that amount is permitted to be deducted from the investor’s income. So if your income was $80,000 per annum and your negatively geared investment caused you a $5,000 loss, you could reduce your yearly taxable income to $75,000. You would already have paid tax as if you had earned $80,000, so you can claim back that $5,000 loss at your marginal tax rate of 30%. So you would receive a refund for $5,000 x 30% = $1,500 in cash.

This tax incentive is provided by the government for all forms of investing, not just housing. Share investors take advantage of the same benefit, but I don’t see anyone complaining that it pushes up the prices of shares so that they are unaffordable.

Removing the negative gearing incentive for existing housing might initially skew investors towards that type of housing. If it did, it would distort the market more than current government policy. I think building prices would rise as demand for new homes & apartments increased. I also think that many would be property investors would go elsewhere, looking for a better return. If they left the market, as they did in 1985, there would be less rental properties available. Unless the government had another way to improve affordability, those that want to buy but can only rent, would inevitably be forced to pay higher rents, as logically there would be less homes provided by private investors for rental purposes. Investors reasonably will seek to make up the return that they may otherwise have been able to create with the tax incentive factored in – they would be looking to increase rents to make up for that loss.

The argument that negative gearing benefits to investors is the reason the houses are no longer affordable is just rubbish. The same policy has existed for more than 30 years, throughout several economic and property cycles. During that time, prices have gone up, sideways and down. It is

The main answer to housing affordability is simply, to make it more affordable. Cut the massive government taxes applying to housing – at Federal, State and Local government level. I have seen reports that suggest that up to 40% of the price of a new home is made up of taxes. Other answers include streamlining state & local approval processes so that more land can be supplied more quickly rather than development applications tied up in red tape for years. In the state of Texas USA, a land developer can take a raw piece of land and have it subdivided in to allotments inside 12 months. It takes three times than (and longer!) in Australia.

The main answer to the Government’s budget deficit issue is to cut spending. Not more new taxes. They don’t need a Rhodes scholar to tell them that they are spending more than they earn. It’s a policy that just can’t endure. New Zealand has done a remarkable job or reining in government spending, producing a budget surplus, introducing new incentives and innovating with policy & legislation. Their economy is growing wonderfully at a time when Australia’s is spluttering it’s way forward.

Why can’t our Government do the same?

Attacking negative gearing is popular politics. The vote seekers make out that anyone who takes advantage of the law must be rich or a crook, or both. Sadly, such a line has many listeners and believers. Fact is that many of property investors who claim negative gearing benefits earn less than $80,000 per year. Everyday Aussies.

What I haven’t seen considered in the phoney debate so far is what the long term ramifications of messing with the negative gearing tax policy could mean. If it is removed or amended, it could mean that people are less incentivized to save, grow their wealth and provide for their own retirement, instead relying on the government pension pittance.

What could that cost our country in the decades to come?

Negative gearing tax incentives are positive policy.

Leave it alone.

 

Craig Turnbull is an author, property developer and real estate investor. He can be contacted here.

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Negative gearing Housing Industry

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