Property Council threatens MPs over negative gearing

You cannot keep a good rent seeker down.

Just in case either side was considering reforming Australia’s negative gearing rules, Australia’s rent seeker-in-chief, the Property Council of Australia (PCA) – has launched a public scare campaign warning that any changes to negative gearing would be politically fraught by threatening both major parties’ 10 most marginal seats. From The AFR:

Property Council chief executive officer Ken Morrison said that “to play with negative gearing is to play with the financial futures of 430,000 people who live in the most marginal seats”.

“My message to politicians is don’t think grandfathering any changes will not upset these investors. Grandfathering simply locks these people into holding the properties they currently have. It will stifle turnover and make these people angry,” he said.

“Beyond the politics, the policy implication of limiting interest deductibility is that it will make investments more expensive. In turn, this will exacerbate Australia’s undersupply of housing and infrastructure. This is the wrong approach for the challenges we have to face.”

The Property Council will submit data showing that 1.3 million of the 1.97 million people who declare to the tax office an interest in an investment property declare a net rent loss. Of these, 839,000 have an annual taxable income of $80,000 or less and are mostly “ordinary workers” such as teachers, emergency service workers, clerical staff, hospitality and transport workers…

In the submission to the inquiry, the Property Council will argue that negative gearing “keeps a lid on rental costs and house prices”.

A few questions for Ken Morrison.

First, why would existing negatively geared investors care if changes to negative gearing were quarantined, seeing as they would not be directly affected? You have mentioned that they would still be angry because it would lock them into “holding the properties that they already have”, but this is flimsy logic, at best. Moreover, if negative gearing “keeps a lid on rental costs and house prices”, as you claim, then wouldn’t these investors rejoice at the rise in house prices and rents that would follow, boosting their investments?

Second, you claim that limiting negative gearing would “exacerbate Australia’s undersupply of housing and infrastructure”. How is this so, given almost 19 out of 20 investors buy existing dwellings (see next chart), and thus do not add to supply? Again, your argument makes no sense.

Third, you claim that 839,000 of Australia’s 1.3 million workers have an annual taxable income of $80,000 or less and are mostly “ordinary workers”. But you conveniently fail to mention that”taxable income” is what is left after deductions such as negative gearing are accounted for. Thus, the average “taxable income” in Australia was only $55,228 in 2012-13 (the latest available data), and 61% two-thirds of negative gearers earned above the “average”.

So, based on the ATO statistics, which significantly understate the magnitude of the issue because negative gearing lowers taxable income, the claim that most people who access negative gearing are just “ordinary workers” is misleading. 61% of losses were recorded by those with above average incomes, even after their reportable incomes were reduced by far more than the average due to negative gearing deductions.

Other analysis that correctly measures gross income or household income are even more damning of the PCA’s claim.

For example, the RBA noted the following in its submission to the House of Representative’s Inquiry into Home Ownership last year:

Tax data also show that the incidence of property investment and the incidence of geared property investment… increase with income…

While the incidence of property investment increases with the level of income, the Household, Income and Labour Dynamics in Australia (HILDA) Survey also suggests that most investor households are in the top two income quintiles. These households hold nearly 80 per cent of all investor housing debt…

So, the top 40% of income earners hold nearly 80% of all investor mortgage debt, according to the RBA.

Modelling last year from the National Centre for Social and Economic Modelling (NATSEM) also revealed that one third (34.1%) of the benefits of negative gearing were captured by the top 10% of income earners, whereas 15.7% of negative gearing benefits goes to the next 10% of income earners (see next chart).

So that’s the top 20% of income earners receiving around half of the negative gearing benefits, according to NATSEM.

Based on this data, it is therefore highly misleading to claim that negative gearing is used primarily by “ordinary workers”, when it benefits the wealthy the most.

Finally, the PCA’s claim that negative gearing “keeps a lid on rental costs and house prices” is illogical. How can it when nearly 95% of investors purchase existing dwellings, thus increasing demand without boosting supply?

Your arguments are all over the shop, Ken Morrison, and reek of desperate self interest.

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