Negative gearing - A boon for investors, not so great for renters: Catherine Cashmore
It’s hard to believe we need to consistently go over the impact a concentration of investment into established housing has on affordability to the detriment of low-income workers and renters.
I’ve written extensively on it in the past, and many papers have been produced to outline the consequences in detail. However, over the past week, I received a string of emails from interested readers and journalists asking for my comments on negative gearing. Therefore, I hope you will forgive me for reiterating a few basic points.
To be against negative gearing as a policy incentive is not a stance against investment into the housing market.
Indeed we need a steady provision of rental accommodation because there will always be a proportion of the population unable or unwilling to purchase, or in need of a transitional period of tenancy due to job changes.
Albeit, a drop in ownership rates from families with children from 79.5%-77.2% over the last census interim - our biggest demographic of home buyers - coupled with yields outpacing both wage growth and inflation over the corresponding period and beyond, highlights a growing and somewhat concerning trend.
Leading up to the peak of 2010, Australia had an unparalleled property boom which not only heralded us top of the “Annual Demographia International Housing Affordability Survey” for subsequent years, but placed household debt to income ratios at around 150% which can hardly be called healthy.
I’m sure many have grown tired of being lectured on the many viable reasons why we’ve seen prices and subsequently household debt increase (ease of lending, lower borrowing rates, and wage growth to name but a few). However, whilst you can argue over the details contained in housing affordability reports as many have done in the past – or fall back on previous statements made by the RBA which conclude:
It’s rather embarrassing that these comparable countries - including the UK, New Zealand, Denmark, the Netherlands, and Canada, and all international terrains which having been through somewhat harder lessons than our own - also battle to induce first home buyers out from underneath their rental blankets as high prices and shortages of stock herald arguments similar to those voiced here.
Yes - Australia has a shortage of accommodation in areas most want to live, work, play and importantly purchase. As I argued last week, this pattern of behaviour has predominantly been driven by years of poor planning for population growth, leading many to conclude, they have little option but to situate close to centralised job districts rather than incur the inflated cost and time of commuting on already over-crowded arterials.
However, all of he above has also been exacerbated by our tax policy of negative gearing.
As the Henry Tax review pointed out, Australia has a system that taxes income from work and savings at a higher rate than other forms of investment (including borrowing and speculating), which are taxed at a lower rate.
In other countries such as the USA, investors of geared properties can only claim tax deductions for interest on borrowings against the income generated by the property until sold. However, the Australian system allows heavily geared investors to deduct against wages thereby reducing their overall tax bill, which, when combined with various other incentives such as depreciation, makes it a very attractive policy for high income earners to the disadvantage of lower wage individuals, unable to bridge the gap between the income the property generates and the outgoing expenses.
The success of negative gearing relies solely on the growth of the asset. Without good capital appreciation, negative gearing doesn’t work. Therefore, investors taking advantage of the incentives are for want of a better word ‘speculators’ who have concentrated their attention on the established market principally in the inner and middle ring suburbs – areas that attract the highest levels of concentrated buyer activity.
Consequently, 92% of residential investors borrow to purchase second hand dwellings, leaving the new housing market without enough investment to induce an adequate provision of supply or infrastructure. This inflates the cost of established stock, leaving a widening gap between price and yield – leading investors even more reliant on the band-aid of negative gearing to fund their activities.
With 1.2 million negatively geared investors (speculators) relying on appreciation, predicting movements in the market place is a national past time. You’ll hear it trotted out frequently that we’re at ‘such and such’ stage of the ‘property clock’ or ‘property cycle’. Second-guessing rises or falls in the RBA rate has become a popular sport on Twitter and various other media outlets.
The RBA noted as early as 2003, when advocating a moderation of demand in the property market amongst investors, by way of tightening of the current negative gearing rules - the rises in Australia’s established market have been inflated principally from a growth in investor demand aimed overwhelmingly at the second hand dwellings.
The RBA described the demand as unprecedented with the concentration overwhelmingly on properties around the median price point (currently circa $500,000) where overall demand from home buyers is also at its highest.
On the surface it may seem somewhat contradictory that a policy benefitting investors could negatively impact renters. Albeit, rather than having the spruiked desired effect of aiding rental affordability and rental supply, the results speak for themselves.
Over the previous five years, Australia’s rental yields have risen 49.2%, outpacing growth in housing loan repayments for the same period. Furthermore, long-term vacancy rates sitting firmly below 5% and in established areas they hover closer to 2%. Does this alone not ring bells that negative gearing as it stands, is doing little to solve rental shortages and consequently a growing affordability crisis?
Some put forward the debate that property investment should be viewed no differently from any other small business such as dog washing and so forth. However, property is not only a wealth generating asset, but as essential requirement for all - on a par with good medical care and food. Governments have a responsibility to provide policies that balance the market for investor, renter and most importantly the homebuyer alike. Not an easy task – but certainly not impossible.
Then there are those who take you back to the Hawke/Keating era during which negative gearing was to some extent quarantined. The result was marginal at best, there was a dampening of investor enthusiasm and a small increase in rental yields in two main markets (Sydney and Perth) both of which were already experiencing vacancy rates below 1% and therefore had other factors weighing into the statistic. However, in other states there was no such rise and in some, such as Melbourne, rental growth actually slowed.
Additionally, the change in policy didn’t stay around long enough to take us through this transitional period and enable effective assessment of the results. Stringent lobbying by the real estate fraternity and property investors ensured at first opportunity the policy was re-introduced.
This is because real estate industry professionals love investors. The transaction process is generally smoother with less emotional content involved and the selling agency benefits from the rental management once the purchaser has settled. This helps cement a lasting relationship with their client’ as well as an ongoing potential income stream. Hence why the majority would rarely voice opposition.
I have no doubt if the policy were removed, or even scaled down, there would be less demand for established stock and a subsequent dampening in prices. I agree that a sudden and complete retraction of negative gearing in its current form would be foolish - favouring a slow wind-down whilst other policies are implemented such as strategies to aid development and increase supply. However, the notion that touching the golden egg of negatively geared property assets in a way which may dissuade buyers from banking on the established market to fund their retirement - seems to be one that’s culturally ingrained in the real estate fraternity.
You only have to turn on the TV to be bombarded with programs from The Living Room to The Block, which make everyone feel like a rookie renovator able to tap into the wealth of their property investments with a quick makeover, or fuel the perception that you can pick up a good property as some magically suggest- below its intrinsic value and add value to create profit - to know obsession with property investment goes above and beyond negative gearing alone.
Indeed, if someone could prove to me that any of our current modes of investment have led to:
1) An improvement in housing affordability and supply;
2) An increase in vacancy rates;
3) A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; or
4) Lower rents for the most venerable in our society
I would be the first one campaigning on the streets in in favour of the plan. However all of the above, negative gearing has failed to do.
I can’t help thinking back to a talk I attended at a previous REIV conference where a Victorian state minister was lecturing on the state of our economy (I won’t mention names). During the course of his speech, he revealed he had ownership of nine investment properties – the majority of which are negatively geared. Therefore, you have to wonder who our leaders are protecting when opposing changes to the current status quo – it’s certainly not the low-income earner or renter.
In other words, negative gearing has been more to do with promoting property inflation growth at any cost, rather than aiding society. However, for those who want more detail on the consequential impact, I suggest reading the latest research paper from the Grattan Institute which can be downloaded here.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.