RBA joins call for negative gearing - capital gains tax review

The Reserve Bank of Australia has called on the federal government to review the capital gains tax break for investment property suggesting it was directing too much money into residential housing.

The call came in its submission to the federal parliament's latest home ownership inquiry.

While the Reserve Bank acknowledged in its housing inquiry submission that negative gearing can assist in keeping rents down, it noted how it worked with other tax rules "may have the effect of encouraging leveraged investment in property."

"The bank believes there is a case for reviewing negative gearing, but not in isolation," the bank said.

"It's interaction with other aspects of the tax system should be taken into account."

The RBA's suggestions follows David Murray, head of the Abbott government's financial system inquiry, seeking a review of capital gains tax and negative gearing.

The head of the government's audit commission, businessman Tony Shepherd also recently recommended lifting the capital gains tax rate to a person's own income tax rate.

"I can't see any reason to treat capital gains any different from income gains," he said last month.

"And I think it does in fact probably lead to a greater emphasis in some respects on negative gearing." 

The RBA noted the proportion of the housing stock owned by investors looks to have risen over recent decades, offsetting the decline in the prevalence of public housing.

" The investor share is also likely to have risen a little further over the past few years, as investors have accounted for an increasing share of property purchases since 2012.

"Data on the proportion of residential property transactions that involve investors as purchasers or sellers are not readily available, but loan approvals data give some guide as to the prevalence of investors as purchasers.

"Investors’ share of loan approvals has risen from a little over 30 per cent in 2011 to almost 40 per cent recently, with the increase most pronounced in New South Wales.

"As noted in 2014, prudent limits on loan sizes are less binding for property investors that have significant equity to deploy than for some other purchasers.

"Typically the interest rate used to calculate allowable loan sizes does not fall as much as actual interest rates, or only up to a point; this practice has been strengthened recently in light of recent guidance issued by APRA (2014).

"This means the marginal borrower has less scope to increase their loan size as interest rates fall. This practice is in the long-term interest of borrowers, as it helps ensure they can still service the loan once interest rates rise again.

"However, it does mean that borrowers for whom these constraints are not binding appear to have a relative advantage during periods of low interest rates, since they can increase their loan size and make larger offers for specific properties.

"In the Australian environment, the most constrained borrower is usually a first home buyer and the less constrained borrowers are investors or trade-up buyers with considerable equity.

"As such, this might help to explain the low share of first home buyers in recent new lending for housing.

"Reductions in state government incentives for first home buyers (of established housing) could also have contributed to this outcome.

"It also implies that the increase in investor demand is likely to have contributed to the recent strong growth in housing prices, particularly in Sydney," the bank noted.

The submission can be downloaded here.