Negative gearing isn't the bad guy in housing debate
Another day and another set of half-truths and myths about negative gearing.
This time, the Grattan Institute is calling for retrospective changes to housing investment that would raise tens of billions of dollars in new taxes on property owners. This is even more than federal Labor's policy that would raise $32 billion in additional property taxes over the next 10 years.
These new taxes are all predicated on myths about negative gearing, rather than on modelling the economic impacts of change.
So let's answer the myths about who uses negative gearing, what benefits they get and what would be the impact on the Budget and the economy if the current taxation system was radically changed.
Myth: Negative gearing mainly benefits those on higher incomes
Fact: 58 per cent of net rental loss deductions by value go to the people with taxable incomes less than $80,000. Only 13 per cent go to those with taxable incomes above $200,000.
Myth: Property investors are driving up house prices.
Fact: Housing investors are helping increase supply and that's taking pressure off house prices. Last year, Australia constructed a record 220,000 new dwellings – 65 per cent were purchased by owner/occupiers and 35 per cent by investors. The investors are vital to helping Australia meet its housing shortfall.
Myth: Negative gearing disproportionately benefits surgeons and anaesthetists
Fact: There are 891 anaesthetists and 1020 surgeons who negatively gear. By comparison, there are 89,900 clerical staff, 48,900 teachers and 33,700 nurses and midwives who negatively gear. Changes to negative gearing will shut the door to these people to build a "nest egg" for the future.
Myth: Negative gearing is a big hit on the budget
Fact: The cost to the budget of negative gearing is dropping. Net rental losses from investment properties have fallen from $7.9 billion in 2011-12 to $3.7 billion in 2013-14. This is a drop of 53 per cent in two years.
Myth: Negative gearing is a rort that does nothing for the economy
Fact: The property industry employs 1.1 million people. The construction of a typical home involves 40 tradies and contractors. The industry is a vital part of the economy. Labor's negative gearing policy puts an additional $32 billion in taxes on property over the next 10 years.
But all these arguments miss a bigger point – those blaming negative gearing for all the woes in our housing markets have constructed a strawman.
When in fact the chronic undersupply in the past decade – leaving a deficit of 200,000 homes against demand – is the root cause of escalating prices and where policymakers should turn their attention.
In Sydney, we are still paying the price for the policies of the previous state government that declared "Sydney is full". The prices that families, couples and singles are paying for housing in Sydney, and in other capitals is a direct result of policies that hinder supply.
No one can escape the laws of supply and demand – and policies that smash negative gearing and drive up capital gains tax, will affect investment decisions.
It is only in recent years that we have started to tackle the housing deficit in our country, and as we have done so, house prices and rents have started to moderate.
However, demand pressures will remain as our population grows. In Sydney alone, it is estimated we will need to construct an additional 44,000 dwellings every year for the next 15 years just to keep up with demand.
During a time when housing investment is vital for jobs and to keep a lid on housing prices, the Grattan Institute and the federal Opposition are proposing radical changes to property investment. They are arguing that property owners, who last year paid a record $45 billion in property taxes (up over 10 per cent), should be slugged even more.
The Opposition has said its policy will not impact investment decisions. My question is when was the last time a government took an extra $32 billion from an industry and expected it to have no impact?
Major changes to negative gearing will make housing investment less attractive. This will, in turn, impact housing supply – and we will return to the bad old days, when supply did not keep up with demand.
If we want to make housing more affordable in our country, we must tackle the blockages to supply and not impose new ones. Proposed changes to negative gearing and capital gains tax will make a bad situation even worse.
First published in the Sydney Morning Herald, 27 April 2016.