Attacking the practice of negative gearing appears to have become a bit of a sport lately. On the 14th March, an article in the Herald Sun stated the government “should look at ways to overhaul an extremely generous system of negative gearing”, and on the 20th March, The Age ran an opinion piece entitled “It’s time to apply the brakes to negative gearing”.
I could speculate that the attention property investors (and their tax deductions) is due to the combination of increasing rents (driven by low vacancy rates) and high property prices (driven by a long stint of housing affordability). However, the cause is not important, and what is important is understanding why negative gearing is an effective housing subsidy.
In the Taxation Statistics 2005-06 publication from the ATO, we can see that:
- There were 1,561,630 people who declared rental income on their personal tax returns.
- 66.5% of those had a taxable loss (net return income less than zero) from their rental properties.
- There were 2,146,685 property schedules completed for those tax returns (note: where multiple people own a property, multiple schedules may be completed for those properties).
And in the Census 2006 QuickStats for Australia from the ABS, we can see that:
- 27.2% of occupied private dwellings were rented, which corresponds to 2,063,947 dwellings. (Pretty close to the 2,146,685 figure above.)
While in the Australian Social Trends 2007 from the ABS:
- There were 394,000 first home buyers in 2003-04.
So, from that barrage of stats, it should be clear that the number of renters outnumbers the first home buyers (in any one year) by over five to one, and the number of renters combined with the property investors outnumbers them over nine to one. Why compare with the first home buyers? Because they are really the only housing segment that is disadvantaged by negative gearing. Beneficiaries include renters, existing home owners, investors and the state governments (through higher land tax and stamp duty fees).
Renters have their rent subsided by the ATO, though the tax deduction on costs provided to their landlords. What other business but property rental is regularly undertaken at a loss? It should be admitted the “obvious” effect of removing the deduction – rising rents – is unproven.
I would expect it to be likely that rents would rise, both from scarcity due to fewer landlords willing to operate without such a deduction, and from those willing to be landlords increasing their rents to maintain their investment yields. However, back in 2003, the ANZ’s Saul Eslake analysed the last time negative gearing was removed (by Paul Keating, between 1985 and 1987) and commented that:
It’s true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn’t show any discernable increase in the other State capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals.
So history is inconclusive. And, rents aside, although you might think that renters would benefit from being able to escape the rental market, many of them don’t want to. A survey by AAMI published on the 3rd April indicated that 39% of renters are “happy to rent and have no plans to have a mortgage.”
Existing home owners benefit from rising house prices since while prices go up, their morgage does not. Although when they come to buy another house, they will need to pay higher prices, they will typically sell their old house into the same market. Also, at some point, they will exit the housing market, and benefit from selling their house without having to buy one.
And that brings us to the conclusion. The group of people able to remove negative gearing are democratically-elected politicians. It’s highly unlikely that such a person will remove a policy that benefits so many, particularly when it’s a Labor government and renters are one of groups that benefit. True, it was a Labor government that removed it last time, but that also means they will clearly remember the embarrassment of having to reinstate it.
Of course, then there is the moral consideration for retaining the negative gearing, and that is: Small property businesses (i.e. individual landlords) should not get a different and less beneficial tax regime than any other business.
All Australian businesses are allowed to expense the costs of doing business for the purpose of tax. Tax is calculated on earnings, being revenue, minus operating expenses, minus depreciation and amortization of capital costs, minus interest payable (i.e. negative gearing). I suppose you might be able to structure it as a landlord so that your investment property is the primary asset of a pty ltd company of which you and your family can be the sole shareholders and directors. Alternately, the government, if it wishes to be equitable can remove negative gearing from ALL businesses, in which you can kiss goodbye to the tattered remains of the Australian economy…
In the end, if the government wants cheaper housing, acting to increase supply, by perhaps INCREASING tax breaks to property developers, is the only solution. Having a roof over one’s head is a necessity, it is a demand that is not substitutable save for the availability of comfortable park benches…
Maybe some fear-mongers are talking about a complete removal of negative gearing, but as far as I’m aware, that’s not what’s really meant, nor what happened in 1985-87.
When people talk about removing negative gearing, they are actually talking about quarantining the tax losses from property to just the property investment “business” of a personal tax return. So, you could offset it against properties making a profit, or carry them forward, but you couldn’t use it to reduce the tax on your primary income.
If you can only offset losses on property income (Which could very well be your primary income if you are a retiree) against profit making properties you are incentivising the following:
1. property investors will want to own more investment properties, in order to better balance their cashflow, some positive, some negative.
2. rents on some types of property will increase in order to take full advantage of losses on capital growth investment properties.
Leave the market free to do its own thing. Government intervention to control housing affordability through tax controls and rent controls have NEVER once had the desired result. If prices are high, and rental yields are high, there is strong incentive for entrepreneurs to build more housing, which is the only solution to high prices. If you make it difficult to realise the maximum possible gain from property investment then you are disincentivising those who would build more houses, thereby artificially inflating prices. removing negative gearing will only make it harder for growing populations to buy houses.
Anne and I are kind of stuck at the moment. With a new addition to the family, if we were to try and buy a house in the suburb where we presently live with just one more bedroom, we will have to save about $70k just for stamp duty. That is on top of a deposit and associated transaction costs. Do you think that might have any effect on our desire to buy property? It sure affects potential investment yield more than negative gearing changes!
I recall that the state governments were meant to phase out stamp duty as part of the GST deal. I guess it was just too good to let go.
However, I think that the long-term solution for housing affordability in Australia is that, culturally, we need to be much more comfortable with high-density living. Until more people are happy to live in blocks of flats, the supply is only going to come from increasing urban sprawl. How to get people to give up the Australian Dream?