Negative Gearing, the Great Aussie Rort
Lately in Australia there has been much discussion about housing affordability. Housing prices have skyrocketed in the last 5 years or so.
What has been the cause of this? A sudden upsurge in new home buyers? No, what has changed has been the increase in investors, competing with owner occupiers for the same, finite, pool of houses.
Of course, people are quite entitled to buy property for investment. But the problem, The Great Aussie Rort, is this: investors get help from the Tax Office, but owner occupier do not. All expenses on an investment property - including interest on the loan - can be claimed as tax deductions.
That is negative gearing. A tax evasion, oops I mean minimisation, scheme available in Australia, but few other places in the world.
This is crazy. With all the tax help investors get, owner occupiers cannot compete. As house prices rise, housing continues to be attractive to investors (who can get the tax man to pay half their losses anyway, but pay minimal Capital Gains Tax on any profit they make when they sell the property), but housing is becoming out of reach to the younger generation.
It is time for the government to wind back, and eventually abolish, negative gearing on residential property, so that there are investors in the market, making housing prices fall, making housing more affordable for Australians.
Now quickly dealing with the usual objections...
1. It was tried in 1985 and didn't work - well duh, that was 20 years ago. Times have changed. The housing market has changed. In 1998, the government reintroduced the GST only 5 years after the electorate had rejected it. So if there's nothing wrong with revisiting a tax reform idea after 5 years, surely it's acceptable after 20.
2. Rents will go up, as they did in 1985 - that's right, and prices will go down. That means more owner occupiers and less renters. Isn't that a good thing? Government assistance, such as public housing, exists for those who still can't buy a house.
3. It will reduce investment and jobs in the housing sector - correction: investment and jobs will move from housing to elsewhere, as people invest in industry (e.g. via the Share Market) instead of housing. And this can only be a good thing: these jobs will produce real export products, not simply houses. Also, there won't be huge amounts of investment sunk into inflated land prices, generating no real wealth at all.
4. Housing prices will fall, and some people will lose money. It's just the same as when housing prices rose: some people will lose money and some people will gain money. The housing boom made some undeserving winners and losers. Removal of Negative Gearing would do the same. And I can't see how it can possibly be more socially disruptive than the huge increase in house prices. There are two types of people who will lose money. First there are the investors. I don't have any sympathy for them. When you invest, sometimes you lose. Besides, they can claim a capital loss when they sell the property. And the government could alleviate the pain by allowing them to spread the loss over more than one year. I have more sympathy for owner occupiers who will be stuck with huge mortages on homes which reduce in value. However, they at least are people who have already decided they can afford it. Again, the government could introduce measures to help people who lose money when they sell their house (again, perhaps allowing a tax loss to be claimed).
So... I'm not holding my breath, but the government needs to act on negative gearing. The sooner it does it, the less disruption. Otherwise, more and more houses will be investment properties subsidiesed by the Australian taxpayer, which means that less and less Australians will own their own home.
What has been the cause of this? A sudden upsurge in new home buyers? No, what has changed has been the increase in investors, competing with owner occupiers for the same, finite, pool of houses.
Of course, people are quite entitled to buy property for investment. But the problem, The Great Aussie Rort, is this: investors get help from the Tax Office, but owner occupier do not. All expenses on an investment property - including interest on the loan - can be claimed as tax deductions.
That is negative gearing. A tax evasion, oops I mean minimisation, scheme available in Australia, but few other places in the world.
This is crazy. With all the tax help investors get, owner occupiers cannot compete. As house prices rise, housing continues to be attractive to investors (who can get the tax man to pay half their losses anyway, but pay minimal Capital Gains Tax on any profit they make when they sell the property), but housing is becoming out of reach to the younger generation.
It is time for the government to wind back, and eventually abolish, negative gearing on residential property, so that there are investors in the market, making housing prices fall, making housing more affordable for Australians.
Now quickly dealing with the usual objections...
1. It was tried in 1985 and didn't work - well duh, that was 20 years ago. Times have changed. The housing market has changed. In 1998, the government reintroduced the GST only 5 years after the electorate had rejected it. So if there's nothing wrong with revisiting a tax reform idea after 5 years, surely it's acceptable after 20.
2. Rents will go up, as they did in 1985 - that's right, and prices will go down. That means more owner occupiers and less renters. Isn't that a good thing? Government assistance, such as public housing, exists for those who still can't buy a house.
3. It will reduce investment and jobs in the housing sector - correction: investment and jobs will move from housing to elsewhere, as people invest in industry (e.g. via the Share Market) instead of housing. And this can only be a good thing: these jobs will produce real export products, not simply houses. Also, there won't be huge amounts of investment sunk into inflated land prices, generating no real wealth at all.
4. Housing prices will fall, and some people will lose money. It's just the same as when housing prices rose: some people will lose money and some people will gain money. The housing boom made some undeserving winners and losers. Removal of Negative Gearing would do the same. And I can't see how it can possibly be more socially disruptive than the huge increase in house prices. There are two types of people who will lose money. First there are the investors. I don't have any sympathy for them. When you invest, sometimes you lose. Besides, they can claim a capital loss when they sell the property. And the government could alleviate the pain by allowing them to spread the loss over more than one year. I have more sympathy for owner occupiers who will be stuck with huge mortages on homes which reduce in value. However, they at least are people who have already decided they can afford it. Again, the government could introduce measures to help people who lose money when they sell their house (again, perhaps allowing a tax loss to be claimed).
So... I'm not holding my breath, but the government needs to act on negative gearing. The sooner it does it, the less disruption. Otherwise, more and more houses will be investment properties subsidiesed by the Australian taxpayer, which means that less and less Australians will own their own home.
posted by Peter at 12:14 AM
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