The Business last night ran a great segment (video above) questioning the merits of negative gearing – a question that I have posed many times over the past two years on MacroBusiness and my old blog.
The transcript is provided below, along with key charts extracted from the video (the original transcript & HD video are available here):
TICKY FULLERTON, PRESENTER: While the Federal Government is going to extraordinary lengths to protect its Budget surplus, one saving still seems untouchable.
Negative gearing is estimated to cost the Federal coffers up to $5 billion a year.
Many economists argue it distorts the tax system for little discernible benefit.
But abolition is a teeny bit problematic with the very real risk of a voter backlash.
Neal Woolrich reports.
NEAL WOOLRICH, REPORTER: House prices and auction clearance rates might be picking up, if only slightly, but the housing market is still in the doldrums.
CRAIG DELANEY, LONG ISLAND HOMES: We’ve already seen a bit of a clean out in the markets. Some well known brands have … are now no longer around and, you know, I think that will continue.
NEAL WOOLRICH: And given that confidence is already brittle, Melbourne-based property developer Craig Delany can’t understand why some are pushing to remove negative gearing.
CRAIG DELANEY: When residential construction is down the industry relies on investment property construction to prop it up.
NEAL WOOLRICH: Negative gearing allows taxpayers to offset losses from an investment such as property or shares against other income like their wages. Over the years there have been many calls to scrap negative gearing, and now it’s also being seen as a saving that would help Wayne Swan protect his promised budget surplus.
SAUL ESLAKE, CHIEF ECONOMIST, BANK OF AMERICA MERRILL LYNCH: It would reduce the loss of revenue arising from negative gearing that, according to my own estimates, runs in excess of $5 billion per annum, and since negative gearing is overwhelmingly availed of by high income taxpayers, it would also improve the equity of the tax system as well.
NEAL WOOLRICH: Property developers argue that negative gearing helps attract investment in new homes. However the Reserve Bank’s statistics show over 90 per cent of property investors buy existing houses rather than building a new home.
SAUL ESLAKE: So, to a much greater extender than owner-occupiers, demand from geared investors pushes up the price of established housing rather than leading to the creation of new housing.
NEAL WOOLRICH: But the Housing Industry Association’s chief economist Harley Dale argues that high charges on new home building is the main factor driving investors away.
HARLEY DALE, CHIEF ECONOMIST, HOUSING INDUSTRY AUSTRALIA: The low levels of investment and new residential property reflects structural obstacles to new housing supply that reflect the fact that of all the sectors in the Australian economy, the new home building sector is the second most heavily taxed.
NEAL WOOLRICH: Some in the property industry have also argued there would be a spike in rents if negative gearing was removed. The Hawke government abolished negative gearing in 1985, but reinstated it before the 1987 election fearing a voter backlash. During that period rents rose in Sydney and Perth, were steady in Melbourne and Adelaide and fell in Brisbane.
SAUL ESLAKE: In truth the reason why rents rose so much in Sydney and Perth at that time was because of rental vacancy rates in those two cities was below 2 per cent on those occasions.
NEAL WOOLRICH: But Harley Dale argues you can’t compare 2012 with the 1980s.
HARLEY DALE: We have extremely tight rental markets around the country that have been tight for a very long time. We have a new home building sector that’s in recession for the second time in four years.
NEAL WOOLRICH: While Saul Eslake says negative gearing could be phased out for a number of years to minimise inequity and market distortions, political reality is another matter. With the business community still bristling over Wayne Swan’s changes to company tax, it might be some time before any Treasurer takes on the 1.7 million taxpayers who rely on negative gearing deductions.
Obviously, I strongly agree with Saul Eslake’s view that negative gearing should be wound-back, since it deprives the government of precious tax revenue, pushes-up the cost of housing, and does little to increase the supply of dwellings or improve rental affordability.
And while I agree with Harley Dale and Craig Delaney that planning restrictions and taxes lumped on new housing developments have adversely impacted new home construction, these are separate issues that have little to do with negative gearing per se.
The Business also deserves some praise for running such a balanced story.
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
