As we approach the federal budget witching hour, reports have emerged over the past week that the government is seriously considering reforming Australia’s negative gearing rules, by grandfathering arrangements for existing investors and potentially only allowing negative gearing on newly constructed dwellings.
Reforms of this nature would be a wonderful development, not just for housing affordability, but also the budget.
According to the Grattan Institute, quarantining negative gearing losses would save the budget around $4 billion per year initially, falling to a saving of around $2 billion per year over the longer term. It would also remove some speculative demand from the housing market, taking the pressure off prices, improving housing affordability and increasing the rate of home ownership.
The Housing Industry Association’s claim that the removal of negative gearing would reduce the supply of rental affordability is also complete bunkum. Reserve Bank of Australia data clearly shows that the overwhelming majority of investors — almost 95% — buy pre-existing dwellings, not newly built dwellings, and that the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 …
Moreover, the amount of investor funds going into new housing has barely shifted in 25 years, whereas investment in pre-existing dwellings has skyrocketed …
And since investors primarily purchase pre-existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. As such, negative gearing has done little to boost the overall supply of housing or improve rental supply or rental affordability.
In the event that negative gearing were once again quarantined and a proportion of investment properties were sold, who does the HIA think they would sell to? That’s right, renters. In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged.
Nor would rents rise due to the policy change. The below chart plots the Australian Bureau of Statistics rental series from 1972, with the period where negative gearing losses were last quarantined (i.e. between June 1985 and September 1987) shown in red. As you can see, there was nothing spectacular about this period, with much higher rental growth recorded in earlier periods when negative gearing was in place …
Similarly, if we deflate the above series by CPI, in order to remove the effects of inflation, we again see that rental growth over the period when negative gearing was last quarantined was nothing special, with periods of higher rental growth recorded both prior to and subsequently …
In short, negative gearing is costing the government billions in lost tax revenue, but is doing absolutely nothing to boost supply. It also creates additional demand from tax subsidised investors, placing upward pressure on home prices and locking out would-be first-time buyers. There is little policy rationale in favour of keeping negative gearing in its current form, whose foregone funds could instead be used to fund schools, hospitals, housing-related infrastructure, or any number of other worthwhile endeavours.
The government would do well to ignore the screams from vested interests, like the HIA, which seems only concerned about protecting the value of its member’s land banks, rather than actually boosting supply.
*This article was originally published at Macro Business
Seriously, now why would anyone in their right mind without NG invest hundreds of thousands of their dollars in an asset which becomes the sole preserve of someone else for months at a time and in that time that vulnerable indeed perishable asset becomes worn and very often deliberately damaged? Let’s see what happens – investors will rightly withdraw, and tenants will be the ones suffering. Housing is a different kettle of fish to other investments and NG is simply a govt housing subsidy. Either way the govt goes, they will have to subsidize housing. So keep the status quo.
Negative gearing is a taxpayer-funded rort which every federal treasurer including, and since, Keating has lacked the guts to kill off.
Hazel studiously avoids mentioning the possibility of allowing negative gearing for new homes only. So does the HIA. Defenders of the status quo cannot afford to mention this proposal, because it calls their bluff by making negative gearing do what they say it does.
Hazel
I think you missed the main point of the article NG investors dont add to supply, they just add to demand. Investors would presumably still be eligible for depreciation allowances on their investment to handle wear and tear.
Negative gearing is not a subsidy or a rort at all. If you lose money on an investment you should be able to deduct it from you taxable income. Because this represents how much money you made that year. And we tax according to our means, not according to some stereotype of the evil landlord. What IS strange is that you cannot do it with other investments, like shares.