By any metric, negative gearing on Australian residential property is one of the least successful economic policies in our country’s history. It was designed decades ago to boost the housing supply by encouraging greater investment in housing construction. Unfortunately it has achieved nothing of the sort.
The policy received some well-deserved criticism this week from the Australian Council of Social Service, which published a reportrecommending that Australians should no longer be able to claim losses on investment properties against their wages.
It’s a sensible policy recommendation but Prime Minister Tony Abbott immediately rejected the idea. It’s no surprise that there is little desire in Canberra to reform housing policy; back in 2013, Australian parliamentarians owned 563 properties estimated to be worth over $300 million (The conflict of interest killing housing reform, August 6 2014).
It’s difficult to mount a defence of negative gearing using logic or sound economic principles. It’s a policy that is almost entirely directed towards property speculation rather than productive investment. It costs Australian households and businesses billions of dollars -- and is a major cause of rising household debt and property prices -- but has led to no discernible increase in living standards.
Based on the latest data, new construction accounts for just 6.5 per cent of the total value of investor loan approvals. The long-term trend could not be clearer: Australian investors don't want newly constructed properties.
Rather than boosting the housing supply and increasing employment within the construction sector, negative gearing has instead encouraged speculation, boosted house prices and undermined home ownership.
Negative gearing isn’t solely to blame -- the capital gains discount also has a lot to answer for -- but it’s hard to frame an argument in which negative gearing isn’t a refuge for tax avoidance rather than productive investment.
According to the ATO, Australia had 1.9 million property investors in the 2011-12 financial year. Most of those investors failed to cover their costs, suffering a $7.9 billion net rental loss. Losses of this magnitude have become exceedingly common in Australia over the past decade.
According to ACOSS, over half of individual taxpayers taking advantage of negative gearing are in the top 10 per cent of income earners (earning over $100,000 in 2011). Around 30 per cent earned over $500,000.
That busts the myth -- usually perpetrated by the Housing Industry Association -- that property investors are generally middle-income ‘mum and dad’ investors. Sure, those investors exist, but the vast majority of tax concessions from negative gearing accrue to wealthy Australians. A point so obvious that it’s hard to believe that HIA ever pretended otherwise.
HIA also claims that removing or quarantining negative gearing would cause rents to skyrocket. It’s a bogus claim since the last time that negative gearing was restricted -- by the Hawke government from 1985 to 1987 -- there was no identifiable surge in rental growth.
Another common argument for maintaining the existing framework is that negative gearing creates a stock of cheap rental property. The facts, however, speak for themselves: investors were more active in building new properties during the brief restriction on negative gearing than in any time since then. These days, negative gearing does not contribute materially to the housing stock, instead it simply replaces homeowners with landlords.
I don’t blame property investors for taking advantage of the benefits of negative gearing -- they’d be crazy not to -- but it’s clear that it’s a policy that serves no purpose aside from reducing the tax burden of Australia’s wealthiest citizens.
If that’s the case, why doesn’t the government simply remove negative gearing and simultaneously cut taxes? The end result would be revenue neutral but would also remove the capital market distortions that have made negative gearing so destructive.
Alternatively, why doesn’t the government restrict negative gearing to newly constructed properties? At least then the policy would actually achieve its original purpose of increasing the housing supply and boosting employment.
Unfortunately, the reality is that reforming the rules surrounding negative gearing is plagued with difficulties. Our politicians clearly lack the political courage to tackle housing affordability, while many investors would be left vulnerable to any change in the tax code.
In practice, any change would have to be grandfathered in, which would limit the exposure of current investors and allow prices to adjust more gradually. The US approach, which only allows losses on property investment to be offset against property income, appears to be a sound model.
It’s time that our politicians, at both the state and federal level, begin to take housing affordability seriously. Unfortunately the government, through inaction, is actively supporting excessive speculation, capital market distortions and rising indebtedness.
Had they actually pursued housing reforms over the past decade, rather than cheering on their own property portfolios, then perhaps the economy would be in a much stronger state and better placed to manage the end of the mining boom. Unfortunately, reform remains as distant as ever. Sound policy is no match for political greed.