It is difficult to find a government policy less successful at meeting its objectives than negative gearing on residential property. Many Australians dream of owning their own homes, but this seems increasingly further out of reach; with homelessness and unstable housing situations on the rise in our country, housing affordability and access has reached a crisis point.
As property prices continue to rise steadily across all Australian capital cities, the conversation around the most effective way of addressing the housing affordability crisis has intensified.
Instead of supporting the housing supply and boosting construction-related employment, negative gearing has effectively encouraged speculation and boosted house prices. 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.
Statistics from the Australian Tax Office paint a clear picture: property investment is popular in Australia but few of those investments generate sufficient rental returns to cover their costs. A rental property is negatively geared when it is purchased with the assistance of borrowed funds and its expenses exceed the rental income and a loss is incurred.
Negative gearing deductions are most beneficial to people in high income brackets where they are in the top marginal tax rate. With the majority of people who have negatively geared residential property are in the top 40 per cent of income earners and the top two per cent of income earners claim half of all capital gains.
Unfortunately the inherent nature of housing policy in Australia sees sound policies are ignored in favour of policies that encourage assumption and conjecture but reduce actual home ownership and redistribute wealth towards the already affluent.
The budget savings from the reform of negative gearing can be used for new affordable rental accommodation for thousands of families and individuals stranded on social housing waiting lists and suffering homelessness.
The 1985 Hawke government confined ‘losses’ generated through property investment against the income from the same assets. It’s often referred to as an action that led to an increase in rents and an investor ‘strike’. In fact, the national investment in rental property increased over that period by 42% (in terms of the total value of loans), and rents only rose in two already overheated and undersupplied cities: Perth and Sydney. Beyond these cities, rents remained flat.
While the rent increases in two cities did coincide with the temporary removal of negative gearing tax deductions, it is unlikely that change had a substantial impact on rents in any major capital city in Australia.
Moreover, negative gearing is costing the government billions in lost tax revenue, yet is doing 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.
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.
There is little policy justification 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.