Fairfax’s Peter Martin has today written a nice dissection of the negative gearing debate, imploring the Labor Party to push on with its plan to unwind negative gearing, grandfathering rules for existing property investors whilst targeting taxpayer concessions towards newly constructed dwellings only:
Negative gearing and the associated capital gains tax concession aren’t the only reason houses prices are soaring. But they are part of the problem, a part that can easily be dealt with without hurting renters or anyone else (including investors presently negatively gearing).
Tony Abbott’s stand is more about differentiating himself from Labor than it is about getting people into houses. It’s about rhetoric rather than results…
Fourteen out of every 15 dollars borrowed for investment housing is spent on existing homes.
Labor is considering a proposal to put negative gearing to work. It would allow existing negative gearers to keep doing what they are doing. No-one would be rushed into selling anything. Anyone who wanted a new negatively geared property would have to build it. It’s the same rule we apply to foreign investors. They are allowed to build but not to buy. The Melbourne-based McKell Institute reckons it would boost the supply of new houses by 10 per cent while boosting the annual tax take by $1 billion.
Labor ought to be able to sell it. It can rely on the treasury, the Reserve Bank, the OECD and the financial system inquiry for tacit support. Only the government is out of step. Labor can position itself as the party of more more affordable housing.
My preferred reform of negative gearing is to adopt the Greens’ policy of grandfathering arrangements for existing investors and quarantining negative gearing so that rental losses on both houses and shares could no longer be claimed against unrelated wage/salary earnings. This is because including both property and financial assets would minimise tax distortions, would overcome concerns about unequal tax treatment between asset classes, and would probably be easier to administer.
That said, I am a pragmatist and support the Labor Party’s more politically palatable proposal of restricting negative gearing to new builds over the Coalitions’ do-nothing approach, which would continue to see investors pile into established homes (see next chart), thereby doing nothing to alleviate supply shortages, placing upwards pressure on home prices without dampening rents, whilst continuing to rob the Budget of forgone revenue.
Indeed, the beauty of the Labor Party’s approach is that it nullifies the Government’s and property lobby’s lies that negative gearing would push-up rents. After all, what better way to overcome concerns about rental supply than providing incentives to boost supply?
As argued by the McKell Institute, a new-builds only policy “would have multiple benefits in the housing market: (i) greater price stability, (ii) increased access for new entrants, (iii) lower rental rates, and (iv) provide a boost in residential construction with an associated boost to employment, economic growth, and taxation revenues…”
To their credit, Labor and the Greens at least acknowledge the negative gearing problem and appear to have a plan. By contrast, the Coalition are intent to maintain the status quo of shutting younger Australians out of home ownership and blowing a bigger and more dangerous bubble.
Here’s hoping the Labor Party does not get weak kneed and follows through with reform.
