Should negative gearing be changed? The experts have their say

It’s two words that are continually circling around the property sphere: negative gearing. We’re yet to hear the Liberal government mouth them and so far there have been no announcement on what it plans on doing.

It’s a friend to property investors but a foe to first home buyers, with Matt Cowgill tweeting that the home ownership rate among 25 to 34 year olds has dipped below half.

According to a report by the Grattan Institute, negative gearing and the capital gains discount provide residential property investors with nearly $7 billion a year, or $4,500 on average for each property investor.

The report suggests that the current government welfare and tax policies benefit wealthy homeowners, leaving young renters and first home buyers disadvantaged.

Catherine Cashmore has emphasised that to be against negative gearing as a policy incentive is not a stance against investment into the housing market.

Property Observer has asked property institutions and experts active in the property space to weigh in on the debate.

They were asked: Should negative gearing be change? Why or why not?

Shane Oliver – Head of investment strategy and chief economist, AMP Capital 

THE REAL PROBLEM IS LACK OF SUPPLY, NOT NEGATIVE GEARING

It seems every time the Australian residential property market takes off, calls appear for negative gearing on investment property to be restricted or abolished. But is it really the reason Australian housing is so expensive? Yes, it does seem investors have a bit of an advantage over first home buyers and yes, first home buyers seem to be missing in action right now.

But negative gearing is not the real problem. Australia is not alone in providing some form of tax assistance to home owners as most comparable countries do. American’s can even deduct interest on the family home from their taxable income, and yet our house price to income ratios are much higher.

Removing or curtailing negative gearing could even make the situation worse by reducing the supply of rental accommodation at a time when rental yields are hardly attractive for investors and could cause other distortions in the economy because negative gearing would still be available on other investments.

The real problem is a lack of supply. In a well-functioning market when demand goes up, prices rise and this eventually is met with increased supply. This has not been happening in the Australian housing market. We have had a world beating surge in house prices relative to incomes since the mid-1990s and yet building approvals are in the same range they have been in since 1990.

According to the National Housing Supply Council the cumulative supply shortfall since 2001 thanks to gross underbuilding relative to growth in underlying demographic demand for homes is 228,000 dwellings. What we really need to do is reform the supply of housing – release land for development faster, relax (within reason) development controls and develop a long term plan to decentralise away from our major cities.

This would be the best way to help first home buyers and cool speculative interest in housing. Negative gearing is a furphy.

Steve Keen – Professor of economics and finance, University of Western Sydney 

IT NEEDS TO BE GRANDFATHERED OUT OF EXISTENCE

Negative gearing should be grandfathered out of existence: those who've already bought an investment property would continue to be eligible, but it should not be available in future.

The simplest reason is that it has failed in its one supposed policy objective: to enhance the supply of rental properties. What it has instead done is encourage individuals to speculate on the prices of existing properties. It has thus driven up house prices above what they would be if the government wasn't meddling in the property market, while doing precious little to increase the availability of rental properties by stimulating new construction. Borrowing by investors for building construction has fallen from 60% of investor loans to below 10% over the last three decades - a clear sign of a failed policy.

So why is it maintained? Because the policy has created a class of speculators whom neither party has the courage to anger by abolishing a failed and socially damaging policy. The continued existence of negative gearing is a measure of the cowardice of Australia's political elite.

Next page: Terry Ryder and Peter Bushby have their say

Terry Ryder – Founder of hotspotting.com.au 

THERE’S NO REASON FOR IT TO BE CHANGED

I would say categorically, no and I’m absolutely 100% certain that they won’t be. It’s an issue that just keeps getting brought up but no politician with his head screwed on is going to make that change to negative gearing.

There’s no reason for it to be changed, it’s a system in place for clear reasons, for valid reasons and it works. The one and only time that a government in Australia decided to scrap it precipitated a disaster in the rental market and they had to bring it back very quickly. That happened in the era that Bob Hawke was prime minister and Paul Keating was treasurer.

Particularly in our capital cities, negative gearing is necessary for the viability of people buying investment properties. Without it, there would be a sharp reduction in the number of people who a buying properties in the capital cities because it’s very, very hard in our major cities to buy an investment property that’s positive cash flow. The vast majority are cash flow negative and without the tax benefit, it’s not a viable investment, therefore the pool of rental properties that are needed for those who rent, would dry up very quickly.

I’m not arguing from the viewpoint of vested interest, I don’t buy negatively geared property, I always buy positively geared. From my personal viewpoint, I don’t care whether it exists or not because I’m not affected but I think it would be a disaster for the property market for people who need to rent if it were removed. As it happened previously when Paul Keating removed it briefly before bringing it back.

Peter Bushby – President of the Real Estate Insitute of Australia (REIA).

NEGATIVE GEARING NEEDS TO BE RETAINED, STAMP DUTY NEEDS TO BE ELIMINATED

We [REIA] strongly agree with the report’s [Grattan Institute Renovating Housing Policy] recommendations to eliminate stamp duties, however it’s essential negative gearing be retained in its current form for the purpose of property investment.

REIA has always supported negative gearing because it helps in the provision of rental accommodation. Negative gearing for property investment is complementary to the goals of the Government’s Housing Affordability Fund (HAF) in addressing the supply of rental accommodation.

To remove it would show that we haven’t learnt anything from history. When negative gearing was abolished in 1985 it had disastrous consequences for the property market and for people trying to rent. Rents rose 37% across Australia and by 57% in Sydney. Thankfully, negative gearing was reinstated in 1987.

It is far too short sighted to link investor interest in housing to negative gearing alone. Negative gearing is only one of a range of factors that contribute to the level of investment in property. Other factors include interest rates, availability and accessibility of finance, share market performance, the unemployment rate, housing supply and consumer confidence.

The myth that negative gearing is a plaything of the wealthy also needs to dispelled. The majority of taxpayers with a negatively geared property earn less than $80,000 a year. With the new government, expectations that industry will be involved in finding workable solutions to these old issues are high.

The debate is quite prominent in the twittersphere, with Catherine Cashmore and Oliver raising their concerns.

@CCASHMORE_BUYER ..I seem to recall in late 80s NG was curtailed only to be returned after its removal reduced the supply of rental accom

— Shane Oliver (@ShaneOliverAMP) October 22, 2013

If you would like someone’s opinion added to the list, please email ntrotman@propertyobserver.com.au and we’ll consider getting their viewpoint.