Property groups adding to market myths: Terry Ryder

Property groups adding to market myths: Terry Ryder
Property groups adding to market myths: Terry Ryder

Two property groups have teamed up to debunk media myths – but have actually added to them.

In seeking to dispel misconceptions about negative gearing and capital gains tax, the Property Council of Australia and the Real Estate Institute of Australia have added to the great seething mass of misinformation about real estate.

They have also missed a clear opportunity by failing to address two of the biggest arguments in favour of negative gearing and other investment incentives. 

That’s a shame. The media hysteria around negative gearing and the CGT “discount” needs a strong and coherent response from the real estate industry.

The PCA and the REIA have sought to provide that by asking a consultancy group to put together an evidence-based examination of the issues. To a certain degree it’s been a worthy exercise because the report presents facts and reasoned analysis, in contrast to media treatment of the issues.

It provides cogent responses to some of the lies about negative gearing, using official figures to show that this is not a tax benefit to the rich, nor is it a massive burden to the Federal Budget with no benefits to society. It shows that investors do indeed contribute to the creation of new housing supply and therefore assist in making homes more affordable. 

But it adds to the problem by reinforcing the notion of a runaway national property boom with soaring prices. It refers frequently to the “current booming residential property market”, belief in which has caused the lunatic fringe to target the industry with a sustained series of irrational attacks.

It also reinforces the greatest myth in Australian real estate – the claim that a national housing shortage exists. It’s poor form by these groups to self-righteously claim to be debunking other people’s myths while re-stating their own equally-fallacious furphies.

The PCA and REIA have also failed themselves and their industry by missing the opportunity to make two of the strongest arguments in favour of investment incentives like negative gearing.

The report examines how much negative gearing costs Budgets but doesn’t consider how much other revenue would be lost if negative gearing was disallowed. If this incentive to investment was removed and Australians stopped buying investment properties (and other forms of investment which have negative gearing provisions), other revenue streams would reduce, including stamp duty (State Governments would be screaming from the high heavens), land tax and capital gains tax. 

Given that the total tax take from the property industry is over $70 billion per year, and the amount claimed in negative gearing benefits is a tiny fraction of that, what would be the overall long-term impact to all government budgets – state as well as federal – if negative gearing ended?

To my knowledge no one has addressed this because everyone is looking at the issue from their own narrow viewpoints and the big picture has been lost.

But there is a bigger issue not discussed in this “debate” – and I couldn’t find any reference to it in the REIA/PCA report. My contention is that the Federal Budget would be a massive loser long-term if negative gearing was disallowed.

Here’s why. The biggest problem for the Budget is the mounting cost of welfare, notably pensions paid to retired people. The problem will get considerably worse, because of our ageing population. Successive Governments have told Australians they have to invest to provide for their own retirement years, because the nation cannot afford to fund them with pensions.

The nation needs to provide incentives to invest. Negative gearing it one of them – and it applies to other forms of investment including shares, businesses and artworks, as well as to real estate.

If we remove negative gearing, it will have to apply across all investment vehicles, not just to real estate. It’s a reasonable expectation that if the incentives are removed, many people will not invest. They will stagger into retirement with a small amount of superannuation and a need to claim the pension. 

A small short-term saving to the Federal Budget will result in a major long-term loss.

The anti-gearing attack is based on the claims that it inflates prices and damages government budgets. There is no evidence that negative gearing results in rising prices, because it’s impossible to measure. 

What we can say with certainty that we currently have negative gearing in place and prices are not rising strongly in any of our major cities except Sydney. If negative gearing inflates prices, why is there no price growth in Perth, Darwin or Canberra, and only muted growth in Brisbane and Adelaide?

Another thing we know, from the experience of the last time negative gearing was disallowed (in the 1980s), is that it results in higher residential rents.

The true impact on government budgets will not be known until someone does a proper study which includes the impact on other forms of real estate revenue if people stop buying investment properties (and other types of investments, including shares) and those who currently own them sell them to home buyers.

My belief is that there would be a net loss to state and federal budgets in the short-term and a massive cost in the longer-term because there would be considerably fewer self-funded retirees. 

TERRY RYDER is the founder of hotspotting.com.au. You can email him or follow him on Twitter. 

Terry was recently joined by Property Observer editor at large Jonathan Chancellor for a webinar on why research is the key to successful property investing in 2015. You can download slides and audio from the webinar here.

Terry Ryder

Terry Ryder

Terry Ryder is the founder of hotspotting.com.au.

Tags: 
Property Myths

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