Wow. The Murray Inquiry seems to have slipped something into the water. Following the HIA’s shallow defence of negative gearing, Business Spectator’s Adam Carr has chimed in with more gruel:
Home lending figures already show first home buyer activity at its lowest on record.
If that trend continues, then it’s likely Australia will follow other major advanced economies with already have low or declining rates of home ownership…
It’s against that backdrop that any punitive measures taken against investors, including regular calls to scrap tax breaks such as negative gearing, would prove extremely harmful and have deleterious consequences for the economy and society at large.
This is because if global trends are any guide… then the burden for maintaining Australia’s housing stock will increasingly fall to the investment community…
Australia already has an acute housing shortage. …if policymakers genuinely want to rebalance the economy and address Australia’s chronic housing shortage with a much needed construction rebound, then the country needs to stop treating investors as the enemy…
Sorry Adam. The reason first home buyer (FHB) demand is so low is because housing has become unaffordable. FHBs are priced-out of the market, in part because excessive speculative investment is placing upward pressure on prices, crowding-out FHBs in the process.
You simply cannot ignore the ABS housing finance data, which shows investor demand rising to record highs at the same time as FHB demand has fallen to record lows (and an inverse relationship between the two):
Negative gearing is clearly a major part of the problem facing FHBs, not part of the solution.
Carr’s claim that negatively geared investors are alleviating Australia’s housing shortage also does not hold water. A quick examination of of the RBA statistics shows that the overwhelming majority of investors – over 90% – invest in existing dwellings rather than construction, and that the proportion of investors constructing dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).
Moreover, the amount of investor funds going into new construction has barely shifted in 25 years:
Because investors primarily purchase 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 was quarantined so that losses could no longer be claimed against wage or salary income (as occurred between 1985 and 1987) and a proportion of investment properties were sold, who does Carr think they would sell to? That’s right, renters (or other investors). In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties, leaving the rental supply-demand balance unchanged.
Let’s also not forget that Australia is one of only a few nations that allow investors to deduct property losses against unrelated income. And yet we have one of the most unaffordable housing markets in the world and chronic supply problems (despite a massive land mass). What does this tell you about the efficacy of Carr’s arguments to retain negative gearing?
In any event. If Carr was truly interested in boosting housing supply, he would be lobbying to free-up the various supply-side constraints that prevent affordable homes from being built, rather than supporting an egregious tax lurk that costs taxpayers billions in foregone tax revenue, does nothing to boost supply, and crowds-out FHBs.
