Questions around housing affordability have become a key talking point in public life. Separating the facts from the myths has become difficult, though, particularly around the role the tax system plays in boosting prices.
Going back to basics for a moment, are Australian property prices actually unaffordable? For many Australians, the answer is yes. Recent data from the International Monetary Fund ranks Australia as third least affordable when comparing the ratio of house prices to incomes – only Canada and Belgium are more unaffordable – whilst a typical property in Sydney will cost upwards of twelve times average annual income.
Are investors responsible for the unaffordability of houses in many Australian capital cities? Not entirely. Many property experts point with some justification to supply issues in the housing market; quite simply, we’re not building enough new houses to satisfy our increasing population.
Let’s be realistic though, the supply side isn’t entirely to blame. Visit many property auctions in Melbourne and Sydney and you’ll spot first home buyers looking on disconsolately as cashed-up investors drive up the price for promising-looking properties beyond a level that’s remotely affordable unless you have cashed-up parents. And many of those investors are there because the tax breaks available to them make the purchase more attractive.
When we talk about negative gearing, we’re typically talking about two different tax breaks that are used in conjunction with each other as part of a property investment strategy.
On the one hand, investors can deduct the day-to-day costs of financing and running their investment property from their rental income. About two-thirds of property investors (over a million taxpayers) actually make losses, which they can offset against other income, often generating a tax refund at the end of the year. On the other hand, our generous system of taxing capital gains – we allow taxpayers to discount capital gains by 50 per cent if they simply hold their asset for more than 12 months – halves the CGT payable when properties are ultimately sold.
The interaction between the two makes property investment a highly tax-advantaged strategy at a time of rising prices. Conversely, where prices are falling, the impact of negative gearing is reversed and taxpayers can find themselves getting badly burned.
This latter point is crucial. Although tax perks can play a part in building up a housing bubble, ultimately there are usually bigger factors at play that are the main drivers of house price boom or bust. In Perth a few years ago, property prices were pumped up by the mining boom and investors with an eye to a quick buck flocked in. Subsequently, once the boom ended, the market weakened and suddenly negative gearing no longer looked like such a good idea.
Sooner or later, the same thing will happen in Sydney and Melbourne, and it will happen whether the tax rules are reformed or not. There may be sound policy reasons for looking at aspects of tax policy around housing – many countries only allow losses on investment properties to be offset against other property income, which feels like a broadly sensible idea – but wholesale reform of negative gearing is unlikely to be the magic medicine that cures our housing crisis.
Do you think negative gearing should be scrapped? What effect do you think scrapping it would have on the housing market? Let us know in the comments section below.
Also read: Can you transfer a property to someone without selling it?
Negative gearing and capital gains tax concessions combine to drive up house prices there is no doubt about that. High immigration is another major factor.
For that reason alone both concessions should either go entirely or only be applicable to new builds.
In addition to that both concessions bring huge tax benefits to the wealthy and no tax benefit to the bottom end. In fact they hurt the bottom end because rising property values lead to higher rents.
Couldn’t agree with you more David. Negative gearing was brought by the rich for the rich and is effectively a reverse form of Robin Hood taking money from the poor and giving it to the rich with no thought of the consequences, only greed.
In the case of ‘Negative Gearing’ the name should be ‘Robbing’ Hood – It needs to be totally abolished IMMEDIATELY.
I don’t own any investment property but people I know who do say with all government regulations and taxes they are making very little now so if negative gearing is abolished they will sell and rental properties will be lost.
Also on tv there are prefab buildings built in 3 days. Why can’t the govt build those?
I think there are two far more important priorities to address. First, STOP the immigration. We don’t have enough houses, so why are we importing more and more people who need houses? Second, fix the shocking state of building regulation and training. We will never get more supply while competent and ethical builders and tradespeople are leaving the industry because it is in such a mess, and people are scared to engage in building or renovating because there is zero protection from the multitude of incompetent, dishonest, unethical tradespeople who hold valid licenses despite destroying lives for profit.
The training systems are appalling. Trainers certify people as qualified after a couple of months, despite them having no valid skills at all and no knowledge of building codes. The regulators are selling licenses to anyone and everyone with no care or discretion, and when a client reports that they have spent good money paying a qualified and licensed builder or tradesperson who did an appalling job, leaving hideous defects that cost a fortune to remedy, the regulator often takes no action at all, but just fobs the client off with pathetic excuses. Government-run home warranty insurance programs are a joke, given the difficulty of claiming and the shockingly inadequate upper limits of benefit. A past employee of the QBCC openly admitted that the staff assessing claims in Queensland are completely unqualified, untrained, and lacking any relevant knowledge, yet are pushed to make fast decisions and are often wrongly denying clients a benefit they are entitled to. The legal system is a complete farce, requiring clients who are wronged by either a builder/tradesperson or the regulator to stall their build for years and spend tens of thousands of dollars on lawyers, often only to have the builder they sued declare bankruptcy (having moved assets to a safe haven) or the regulator told to ”review” their decision (which means make the same decision again but for a different reason!) No wonder there is an inadequate supply! Only the minority who are unaware of the appalling state of the building industry, or the extremely brave, would undertake a building or renovating project.
But sure, attack investors. Then there will be far fewer rental properties available and rent will skyrocket! Idealists never consider the negative effects of their idealistic proposals. Negative gearing and capital gains concessions enable many ordinary Australians to save for retirement, provide quality and affordable accommodation for a family wanting to rent, and in some cases get a foot in the property market early by buying a low cost investment property in a country town to offset the rent they pay in the city where they work. Capital gains tax is a fair and equitable concession for people who buy land to build and then have to sell it and buy elsewhere after a job transfer or other forced relocation. Maybe the rules need to be reviewed, but let’s tackle the more obvious problems first. Proper training and regulation of the building industry and more sensible planning and development rules would immediately boost supply. And cutting immigration would instantly cut demand. More supply and less demand equals downward pressure on prices and fewer homeless.
Abolish negative gearing and we are out in the street. The rent will increase and will not be affordable. Build more houses and reduce immigration, have a balance between supply and demand and the need for negative gearing would be reduced considerably.
I believe negative gearing robs the public purse and at the same time assists an investor to become a property owner. I used to be one many years ago, having been with a “mom and pop” type investment group. What I saw was too many couples with good wages buying off the plan and having more than one each. Both also had great super schemes to provide for their retirement. I have thought about this a lot over the years and I think one property per person ought to be the norm, provided there are other super schemes in place from a proper income. Anything more than that is greed, removes much needed money from the tax pot. I don’t know if it is possible but I would love to see “first home buyer” auctions, which may go a long way to prevent the cashed up buyers getting their foot in the door. Yes, immigration is a problem and I could add examples of poor workmanship, phoenixing etc and poor legal processes. All in favour of folk trying to get their foot in the door but the current regime rewards the well off, and pushes the poorer further down. And we should be building masses of tiny homes in nice estates, not just for homeless but others who might want to downsize.
If negative gearing is abolished you will see a final exodus of the private investors. There has already been a significant drop in private rental properties because of the increasing regulations favouring tenants over the property owners. There is an interesting example how Argentina just fixed the problem of a lack of housing. They abolished all regulations in regards to housing. The result was a sudden increase of rental properties coming on the market which was leading to a drop in rental costs. Problem solved!