HIA continues negative gearing subterfuge

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By Leith van Onselen

The brainiacks at the Housing Industry Association (HIA) have produced another piece of self-interested “analysis” warning against changes to negative gearing and lobbying to remove stamp duties. From The SMH:

Cutting back tax deductions for property investors would erode housing affordability, reduce housing supply and bump up rents, a new report says…

…reducing negative gearing would diminish the incentive to invest in housing and exacerbate current undersupply, pushing rents almost one per cent higher…

“Under current housing policy settings, discounting residential negative gearing would lower Australian living standards by making the tax system less efficient,” the report says…

“Adding to the tax burden on rental properties reduces the incentive to invest in housing, and therefore reduces housing supply…

Abolishing stamp duty on property transfers, however, would improve housing affordability and living standards, by removing barriers to investing, the report said.

While it is true that winding back negative gearing would “diminish the incentive to invest in housing”, why would this be such a bad thing?

Removing some speculative demand from the housing market – which is absolutely rampant at present (see next chart) – would take the pressure off house prices, improve housing affordability, and increase the rate of home ownership by allowing more first home buyers to enter the market.

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As for the HIA’s claim about rental supply, Reserve Bank of Australia data clearly shows that the overwhelming majority of investors – over 90% – buy existing dwellings rather than invest in new construction. It also shows that the proportion of investors constructing new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see below charts).

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Since investors primarily purchase existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. As such, the policy has done little to boost the overall supply of housing or improve rental supply or rental affordability.

For this reason, the HIA’s warning that rents would rise if negative gearing was wound-back also does not hold water.

The next chart plots the Australian Bureau of Statistics (ABS) rental series from 1972 in real (inflation-adjusted) terms, 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 no discernible impact from the ‘abolition’ of negative gearing on rents, with periods of higher rental growth recorded both prior to and subsequently. Charts at the individual state level are available here.

ScreenHunter_4318 Sep. 22 12.22

Finally, the HIA’s recommendation that the Government should instead abolish stamp duty is meaningless unless it can identify an alternative source of taxation revenue for the states. My pick would be replacing stamp duties with a broad-based land tax, but would the HIA support such a move?

As noted many times before – so many times that it is getting boring – negative gearing is costing the government billions in lost tax revenue but is doing absolutely 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.

There is little policy rationale 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 initiatives.

The Government would do well to ignore the screams from vested interests, like the HIA, which seems more concerned about protecting the value of its member’s land banks rather than actually boosting supply and improving affordability.

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  1. exactly – negative gearing should be for new construction only……

    as an economic policy position it makes no sense whatsoever to be encourgaing loss making landlords speculating in real estate built sometime in the past

      • The problem is far greater than that, it’s a question of dilution of national character.

        Once if a common need was scarce profit would be sidelined.

        That Australian ethic no longer holds weight.

        It’s not too bad in the up times but when the thing turns, as it always does, our society is so fragmented now that you probably would be a mug to donate to a man down on his luck because you may be the only bloke doing so, leaving yourself exposed.

        That is my normal reaction would be to cop a haircut on my property if it meant getting all you characters a chance at home ownership.

        Now I’m more hesitant, because I see a situation where there seems to be no reinforcement from any quarter of note to back up such a moral position.

    • Strange Economics

      The biggest dollar total amount of negative gearing goes to those in 180k +. (As well as a proportion of their income). At 45% tax down to essentially zero (with discounted capital gains tax only when you finally retire) ./

      Get rid of the capital gains tax 50% discount after 1 year also. Its a flipping specufestor bonus.

  2. It’s the most patent example of self interest.
    The simple equation: NG is good for capital gain/stamp duty is a bad tax. Move along.

  3. When governments do this its obvious they have utter contempt with how they spend tax payer money.
    After all there is always more from where that came from


    Taxpayers are paying boom-time rents for 11 privately owned apartments in the first of Karratha’s twin high-rise residential towers while 28 Government-owned apartments in the second complex sit empty.

    The Government has struggled to sell the 28 apartments it owns in the 178-unit Pelago East tower in a cooling market, leaving them vacant since the building was completed in November.

    The Department of Housing is paying between $1154 and $1537 in rent for the two-bedroom apartments in the Pelago West tower each week – a total of at least $660,000 a year- after it entered into five-year leases with private owners in 2012 when rents were high because of housing shortages.

    The median rental price for a unit in Karratha has fallen since to about $650 a week.

    • Because removing it from existing builds would put downward pressure on these property prices (through the exit of speculators) – and make existing properties relatively more attractive to prospective owner-occupiers than new-builds.

      • So confining a financial incentive to product A (instead of A&B) makes product B more attractive?

        I don’t buy it.

      • @ Patrician

        When the price of product B goes down relative to A, then yes, if you’re looking for a home to live in. Oh wait, you’re talking about specufestors who buy when prices rise. Well who gives a F*CK about them!!! Confine NG to new builds and they’ll soon be trading empty McMansions between each other while the rest of us get on with life. Let’s do it….NOW!!!

    • Exactly, Pat. Perhaps the truth is a little more nuanced.

      Long-time builders will have been saved from time to time from mis-judged construction losses by underlying land price rises. So rising land prices is A GOOD THING.

      Never mind construction costs haven’t budged in twenty years and the cost of new houses is now overwhelmingly in land, which is of no benefit to genuine builders.

      Exchanging Stamp Duty for State Land Tax would be a boon for construction, but as UE suggests, the land banker faction controls the HIA – and advocates policies that injure its membership. This organisation is ripe for revolution.

      • A revolution may not be necessary just a little legwork by a couple of builders who are fed up with the HIA promoting the interests of the land banker members over the interests of members who actually build things.

        Step 1 – Become a member

        Step 2 – Inspect the register of members

        Step 3 – Contact members likely to share your interests and ask them to vote for you at the next election.

        Step 4 – Promote policies that are in the interests of members who are interested in building houses rather than creaming economic rents from land.

        Like most associations – the active members, directors and office holders are unusually a tiny minority of the membership. They often like to keep it that way ( a bit like union officials).

        Here is the constitution for the HIA


        The rules relating to becoming a member are in paragraph 8.4 and are as follows:

        A person is eligible to apply to become a Member if that person:

        (i) consents in writing;

        (ii) is engaged in a trade, industry or profession related to the
        residential building industry;

        (iii) holds an Australian Business Number (ABN);

        (iv) holds a business or occupational license, if a State or Territory in
        which the applicant carries on business so requires; and

        (v) satisfies any other eligibility criteria determined by National Policy
        Congress or the National Board of Directors for the applicable
        category of membership.

        Inspection of Register of Members

        The Register of Members must be kept at the Association’s registered office. A
        Member may inspect the Register of Members between the hours of 9.00 am and
        5.00pm on any business day. No amount may be charged for inspection.

        18.9 Procedure for elections of National Directors

    • Many builders I’ve met have pretty solid property portfolios, I don’t think this stance is solely on the scum land bankers.

  4. Well, the fear mongering about ambit rental increases is easily solved by legislating to tax at a higher rate any increases above a threshold of say CPI + 2% (that are not justified by significant capital improvement), and then eliminating the capital gains discount for a subsequent 10 year period for any landlord who tries it on.

    This nonsense about housing supply is easily addressed by modifying negative gearing to apply to new builds only. It is not beyond the wit of legislators to make a distinction here in the service of a greater national good – that is, ensuring that housing is within the reach of the average income earner not requiring artificially low interest rates or grants to attempt to offset the inflation in the underlying asset caused in large part by taxation biased investment demand for EXISTING stock.

    The alternative is to entirely cede this market to the greedy minority and put it permanently out of reach of future generations of Australians.

      • Strange Economics

        Heres’ the next HIA policy:

        Rents are not going up. Rental yields are low while house prices are astronomical. Investors are suffering mortgage strrss and need help.

        The govt should legistlate that rents will rise as the same percentage as the highest of inflation or wages to help those struggling small investors.

      • They will then employ Keynesian economists to provide research to support the legislative increase of rents.

  5. I think removing NG would cause a crash, even if it were to go to new builds only. So they’re a bit right, it would make housing unaffordable for the 30-40% of unemployed people, and the other 10-20% of bankrupt specufestors

    But for the a lot of the other 50% housing would be very affordable.

    • Arguably, a crash is coming anyway due to China’s rebalancing.

      At least incentivise investors to build more properties and not drive up the prices of existing dwellings.

    • I vote for the risk of crash, for that is all it is – a risk. This risk pales into insignificance compared to the real and present obscene prices. Any chance at affordability must be taken.

  6. Wasted Opportunities

    Can someone clarify the numbers in the charts above for me? The second-last chart suggests a number of $120 billion for investment loans, but isn’t Australian mortgage debt around 90% of GDP (i.e. about $1.4 trillion)?

    This would mean investment loans outstanding are only ~10% of total loans, which is at odds with the first chart at this link:

    Is the $120 billion an annual figure, like the total investment loan issuance each year?

    • Q: What would happen if a significant number of Chinese people believed Roubini’s most recent forecast for the Australian dollar next year (he predicts it will decline at least 20%)?

      Yes, the people buying into Australian property are unlikely to buy into such doomsaying, but if they did, it hardly seems a rational thing to do would be to rush to collect the 20% haircut.

      • imagine if you OWNED property already – 20% decline in value due to carry ?


      • Assuming for the sake of conversation that Roubini’s prediction is well-publicised among Chinese people with the wherewithal to buy property in Australia (i.e. the segment which is far wealthier than the median Australian!), I imagine there could people experiencing a surge in adrenalin which could either lead to denial (fight response) or panic selling (flight response)

        EDIT: The next point you might ponder, if you thought the prediction might come to pass, is the effect the potential panic selling might have on the AUD price of your property…especially if the market suddenly goes back to only having Australian buyers.

  7. At some point, Australia needs to decide whether houses are shelter for human beings or retirement products for Baby Boomers.

      • Unfortunately the fastest growing demographic is retirees. Expect to see more ‘I collect the pension and I vote stickers’ around as that agenda gets pushed extremely hard.

      • I mean that it is coming to a crunch point because debt levels have been rising and now average people can’t afford the average home. So, Australia needs to decide to be humane or continue propping up the retirement nest eggs of the Baby Boomers.

      • Given Australia’s approach to human rights since the glory days of JWH, it seems unlikely that ‘being humane’ is much of a driver.

  8. A rational policy rebuttal of HIA propaganda. Unfortunately public policy stopped being rational many decades ago, especially since the Laffer curve and “trickle-down”.

  9. I notice there is not an author’s name apportioned to this piece in the Sydney Morning Domain. So maybe it is just cut and pasted directly from a HIA press release.

    Must be a bit like Gina’s AFR this SMH.

  10. “Reserve Bank of Australia data clearly shows that the overwhelming majority of investors – over 90% – buy existing dwellings rather than invest in new construction.”

    I think this is beside the point. Most investors purchasing new apartments off the plan would be counted in the data you refer to as puchasing an existing dwelling. This is because they are not taking out a construction loan. They generally only need to borrow once construction of the apartment is completed.

    It is pretty clear that an investor buying an apartment off the plan is contributing to an expansion in the housing supply.

    • I’m pretty sure that’s not the case.. Both Vic & NSW classify off the plan as new housing, for the purposes of granting concessions on stamp duty (which are massive, may i add)

      edit: but yes, an investor buying off the plan is contributing to the additional supply of housing. It just so happens that this type of activity is negligable in the grand scheme of housing investment

      • Or even if it’s empty because, as far as locals are concerned, it’s too small to house their Chihuahua, so no one wants to rent it.

      • Must be a lot of Chihuahua’s putting their paw prints on the residential tenancy agreements judging from the vacancy rates.

        Someone is renting the shoe boxes – probably not happily and probably paying through the nose.

        If only there was sufficient stock on the market that the owners of those shoe boxes were left begging our four legged friends to take up the excess stock.

      • ???

        SQM has postcode 3000/ 3008 around double the vacancy rate for Melbourne as a whole. (5.1/ 5.5% respectively compared to around 2.4%) Southbank (postcode 3008) is at 8.3%!

        Not seeing the tight rental market there.

  11. In the next economic downturn, as employment and income falls there will be forced sales of investor properties as they are loss making. Consider the alternative where rental income completely pay interest and costs, there would be no forced sales by investors upon loss of income. Lets see if the next downturn, that appears to be coming, will cause a change in policy.

  12. I would argue that as homes nominally in the rental market spend more time unoccupied – due to down time between tenants and renovations generally needing to occur while houses don’t have rental tenants

    EDIT: another effect is the construction of dwellings that people don’t want to live in. By definition, owner-occupiers building for themselves never build dwellings no one wants to live in. Investors do, at the moment in Melbourne’s CBD, quite frequently.
    – investors don’t simply substitute rental homes for owner occupied homes with zero effect on the supply of housing, they actually work to restrict the supply of housing, forcing a portion of the housing stock to remain unoccupied. Clearly I disagree with Pat20 above about this.

    Hence. ending measures which encourage investors at the expense of owner-occupiers would increase supply, not have a net zero effect.