Housing
Negative gearing – a bad policy wedged in place
It isn’t hard to put the case for withdrawing negative gearing concessions: Peter Martin puts the case in The Conversation – How Albanese could tweak negative gearing to save money and build more new homes – and in a short (13 minute) ABC interview – Negative gearing rules: should they change?.
Negative gearing adds to demand-side pressure on housing prices, while doing little to add to supply, because most “investors”[1] buy existing properties. For every property owned by an “investor” there is one less property occupied by a home-owner: Martin estimates that within the existing housing stock there would be another 400 000 home owners if negative gearing were not allowed. The negative gearing concession is fiscally expensive: Treasury conservatively estimates that it costs at least $11 billion a year (probably a significant understatement – see last week’s roundup on tax expenditures) and Martin believes that when combined with capital gains concessions, breaks for “investors” cost the budget about $22 billion a year.
Those are the easily-presented figures. It takes a little more explanation to demonstrate that allowing interest as a tax deduction overcompensates “investors”, because it allows a deduction both for the property itself through depreciation, and a deduction for the means to fund it. And more basically it encourages those with a few dollars to save to put that money into housing, rather than into equities – real investments that allow people to share in the nation’s economic growth. (In this regard, the revelation that most politicians own “investment” properties is a worrying sign, not so much of a conflict of interest, but of poor economic judgement by those we elect.)
Peter Mares, writing in Inside Story – On housing, is Labor listening? – reminds us that community organizations concerned with homelessness and rental stress, such as Everybody’s home, reveal the unfairness of these breaks for wealthy property-owners, and call for the funding to be redirected to low-cost housing. Maiy Azize of Everybody’s Home is on a short (6 minute) ABC interview: Advocates call for property tax concessions to be scrapped.
Drawing attention to opinion polling, Azize believes that the community may be becoming more supportive of reforms to negative gearing, as does Martin, who notes that Labor’s broken promise on income tax has been well received.
Perhaps the government is still licking its wounds after Labor’s narrow loss in 2019. The dominant view of the 2019 election results is that Labor’s tax policy, which included negative gearing reform, contributed to its loss. But that was one of three tax-related policies. The other two policies were dumb by any economic criteria: the capital gains tax changes, in failing to restore indexation, would have retained incentives for speculation rather than patient investment, and the changes to dividend imputation would have been easily bypassed by wealthy retirees and would have contributed to housing price inflation.
The polling to which Azize refers may be dated, however. The Essential poll of 13 February shows that support for the specific proposition that negative gearing should be allowed for only one investment property (close to the Greens’ proposal) is low (44 percent) and has been falling over the last 9 months.[2] Kos Samaras of the polling outfit Redbridge says that any fiddling with negative gearing would be “political suicide”, noting from Redbridge polling that only 39 percent of voters believe negative gearing should be prohibited altogether or grandfathered. (Under grandfathering it would be prohibited for new rental properties.) Notably there are significant partisan differences: 54 percent of Coalition voters believe current arrangements should remain, while only 31 percent of Labor voters believe they should remain.
The extent of this opposition to reform is hard to explain. Peter Martin points out that only about 11 percent of taxpayers own “investment” properties. Using a strong assumption that all of these respond selfishly to polling (in reality not all owners of more than one house are selfish and anti-social), that suggests another 28 to 33 percent of voters – let’s say a third -- have some other reason for not wanting negative gearing to be changed. Perhaps, as some suggest, they “aspire” to become landlords. (What a sad aim in life!). Perhaps they realize, as Martin points out, and as Malcolm Turnbull said when he was prime minister, that those concessions help sustain high property prices: irrationally people like feeling that their houses have a high market price. That suggests that people don’t understand that rising property prices are simply inflation. Or perhaps it means that the Coalition’s scare campaigns are effective, because it is possible that most people don’t understand how negative gearing works, don’t realize that the burden of these concessions falls on the 89 percent of taxpayers who don’t have “investment” properties, and believe that the Coalition is better at economic management than Labor.
Whichever of these three explanations holds, this support for negative gearing suggests that there is a deep chasm of economic and financial ignorance in the Australian community. There are plenty of spivs who want that ignorance to prevail – that’s how finance sharks rob us and how the Coalition maintains a core of support.
The Greens are trying to push the government into reforming negative gearing by threatening to block the government’s “help to buy” changes. Surely they know that to concede in the current atmosphere would be politically deadly for the government. Changes to negative gearing, and to taxes generally, have to be pursued outside the two-party political system – by elected independents, by organizations such as the Australia Institute and the Grattan Institute, by economic commentators, and by taxation experts such as Ken Henry.
In time property “investors” may learn that in spite of their undeserved incentives, property isn’t a reliable long-term growth asset. Many of those who have enjoyed the long period of inflating housing prices will become disappointed when the housing market cools. They will be shocked to find that when they sell they will be taxed on nominal price gains that will have reduced the value of the 50 percent valuation, and all proceeds will be taxed at high marginal rates. Costello’s idiocy in abolishing CGT indexation will come back to bite these naïve “investors”.
1. Investment involves building up assets. Buying an existing house isn’t an investment: it’s simply a transfer of ownership, and even buying a new house off the plan or in a recently-completed development isn’t an investment because it was going to be built anyway. There is a difference between what individuals recognize as investment, and what constitutes investment from an economy-wide perspective. Transfer of ownership of an existing asset is not investment. ↩
2. They didn’t ask any other questions on negative gearing. They asked for views on reducing the capital gains tax discount from 50 percent to 25 percent, for which they found only 42 percent support, but anyone who thinks through this issue would be likely to reject such an idea, because it does not restore indexation of gains. It’s the ill-considered policy Labor took to the 2019 election that was rightly rejected by the electorate. ↩
Housing’s two markets
There is no one housing market. Each state has its own housing market, and in each state the market is different in different regions, including regions within our large cities.
The other way the market splits is between renters and buyers. Core Logic’s Elizabeth Owen explains the difference in an article If housing is so undersupplied, why are some markets falling in value?. Renters and buyers have different needs, the most basic being that renting involves less commitment than buying: buyers, be they “investors” or people looking for somewhere to put down roots, are fussier than renters. And buyers are more influenced by interest rates than renters.
Her article includes an informative graph showing inflation (and short bursts of deflation) in house prices and rents over the last ten years. House prices are volatile, but rental inflation, after being close to zero for some years, rose quickly in 2021, to around 10 percent, and has remained at that high rate.