Government not contemplating changes to negative gearing: Wayne Swan

Treasurer Wayne Swan has ruled out any changes to negative gearing arrangements for property investment despite the NSW Labor leader John Robertson saying there should be a debate about its effects on the property market.

Robertson is concerned about the potential of negative gearing to push up property prices and make property unaffordable for the next generation of home owners.

"Everyone, I think, is concerned about how their kids are going to buy a house, how they're going to get into it,” said Robertson in an interview on Sky News.

"In many circumstances, these are people who've got two or three investment properties and there's no real appreciation of what negative gearing is doing in terms of putting pressure on housing prices for their kids to get their first foot in the door."

A spokesperson for Swan says the government is committed to the current tax arrangements after ruling out changes to negative gearing in the 2010 Henry Tax Review.

According to ATO figures, about 1.7 million property owners used negative gearing to claim a net rental loss of $6.5 billion for the 2010/2011 financial year.

Robertson’s call for debate on the effects of negative gearing is backed by Cassandra Goldie, chief executive of Australian Council of Social Service, and was also flagged as a potential area of reform in the Homes for All report, the first public policy document released by the Sydney-based McKell Institute.

Goldie says the McKell report highlights that “negative gearing is at the heart of the problem with inflating house prices” while at the same time not increasing the supply of housing.

"We've got a crisis here so let's have a little bit of courage to deal with it,” she told Channel 10’s Meet the Press program.

Negative gearing is considered a cornerstone of property investment, allowing property investors to claim any loss made on an investment property as a tax deduction and thus reduce their tax bill.

The McKell institute’s Housing for All report says that “federal and state governments should favour tax policies which encourage housing supply over demand”.

It goes on to say that “all politicians of all parties recognise that negative gearing and untaxed capital gains add wealth to existing home owners to leverage for second homes and investment properties without any evidence that they increase overall supply significantly; and that increasing effective housing demand in a constrained housing supply results in an increase in house price inflation and in problems of affordability for those seeking to buy”.

“Tax exemptions such as negative gearing have allowed many people to purchase second, third or even more properties.

“In the past, these may have supported the rental market, but in a market where supply is constrained it simply increases the price of housing for everyone,” the report says.

The institute says consideration should be given to “phasing out of negative gearing over the long term in relation to existing properties but perhaps retained for new properties to stimulate supply”.

The report says that those opposed to removing negative gearing argue that such a move will increase rents or lead to less supply.

“There is little evidence for this argument. Our consultations with the banking industry suggest that housing will remain an asset class with or without negative gearing.

“Housing is an investment class which is easily understood, unlike shares or other financial instruments. It has a permanence – ‘bricks and mortar’ – and certainty which many investors like,” says the McKell Institute.

ANZ head of property research Paul Braddick agrees on the need for supply-side reforms but says removing the ability for property investor to negatively gear both existing and new homes would be “very risky”.

Last year ANZ Australia CEO Phil Chronican raised concerns about negative gearing saying governments should investigate whether negative gearing tax breaks are “fostering an unhealthy focus on housing as an investment vehicle, thereby compounding affordability issues”.