HIA repeats negative gearing lies

ScreenHunter_01 Jun. 28 09.52

By Leith van Onselen

The AFR has published a detailed report today summarising the arguments for quarantining negative gearing. The article cites a number of commentators, including Saul Eslake and the Grattan Institute’s John Daley, who essentially argue that winding back negative gearing would:

  1. Save the Budget money: around $4 billion per annum initially and $2 billion over the longer-term; and
  2. Improve housing affordability, by removing speculative demand from the housing market, increasing home ownership in the process.

It’s all fairly stock standard stuff, and nothing that hasn’t been read on MacroBusiness a number of times before (for example here, here and here).

One vocal dissenting voice on abolishing negative gearing is the Housing Industry Association (HIA), which over the years has gone to great lengths to defend the tax lurk (see here and here).

Today’s AFR article is no exception, with the HIA’s chief economist, Harley Dale, making the following statement:

Housing Industry Australia chief executive Harley Dale warned tinkering with the system would have a “massive negative impact on investor sentiment”. He said rental supply wouldn’t increase if investors were not ­confident. If the government really wanted to increase housing supply it should look to the Henry Review recommendations which ­suggest other changes such as cuts to ­inefficient state taxes like stamp duty, ahead of negative gearing, Mr Dale said.

While it is true that winding back negative gearing would have a “massive negative impact on investor sentiment”, why would this be such a bad thing?

Removing some speculative demand from the housing market would take the pressure off house prices, improve housing affordability, and increasing the rate of home ownership by allowing more first home buyers to enter the market.

As for Dale’s claim about rental supply, Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – almost 95% – buy pre-existing dwellings, not newly built dwellings, and that the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).

ScreenHunter_1946 Apr. 04 09.34

Moreover, the amount of investor funds going into new housing has barely shifted in 25 years, whereas investment in pre-existing dwellings has skyrocketed:

ScreenHunter_1947 Apr. 04 09.34

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

In the event that negative gearing was wound-back and a proportion of investment properties were sold, who does Dale think they would be sold to? That’s right, renters (or other investors that would rent them out). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged.

Indeed, Saul Eslake makes similar claims in The AFR article:

“One of the arguments from the defenders of negative gearing is that it increases the supply of rental housing by attracting investment into the property market” said Mr Eslake, now chief economist of Bank of America Merrill Lynch. “That’s a very poor argument because over 90 per cent is used to buy existing dwellings. Moreover, most countries that don’t have negative gearing, have higher vacancy rates.”

Previously, the HIA has also claimed that negative gearing “keeps a lid on rents”, suggesting that its removal would force rental costs up. Again, this is a spurious claim in light of the above data.

And to illustrate why, the below chart plots the Australian Bureau of Statistics (ABS) rental series from 1972, 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 nothing spectacular about this period, with much higher rental growth recorded in earlier periods when negative gearing was in place:

ScreenHunter_32 Oct. 22 07.40

Similarly, if we deflate the above series by CPI, in order to remove the effects of inflation, we again see that rental growth over the period when negative gearing was last quarantined was nothing special, with periods of higher rental growth recorded both prior to and subsequently:

ScreenHunter_33 Oct. 22 07.42

Finally, Dale’s suggestion that the Government should instead abolish stamp duty is meaningless unless he 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 last week, 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 endeavours.

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.

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Leith van Onselen
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Comments

  1. “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 endeavours.”

    Do you or Saul have any charts about state revenue changes as a result of the NG quarantined period.

    Obviously Saul and Grattan Institute (John) examined the loss of revenue from less property activity and that is reflected in their net gain to the FEDERAL budget.

    What of state revenue?
    Are there any charts or detail regarding state revenue?

    I assume NG was brought in to be stimulatory. … so I’d imagine there would be less investor activity.

    Others on this site believe getting rid of NG will have a slight impact on investor behaviour.

    It’ll be interesting to know what happened in the quarantined period.

  2. UE, would you have data that shows how many IPs are sold off within the first 12, 24 and 36 months of purchase?

  3. Oh man, if this Govt wound back negative gearing I would take back all the negative things I have said about it.. well except the stuff about Direct Action, NBN, Refugees..

  4. Shaun Micallef did an interview with Mr Dale this week. Didn’t say much.

    Lobby groups always shriek ‘the end of days’ on any change – retail hours, drinking hours, award wages and the sky never falls in.

    No reason to believe HIA at all. And if the numbers are modeled accurately there should be way for both sides to look at the figures and foresee the consequences This BS debate is like some idiots convention when claims are made without rational basis.

  5. SingaporeExpat

    Quarantining NG will help reallocate credit to new builds and help the budget and economy in the process. But house prices in general remain linked to credit and credit growth. Are we nearly maxed out?

  6. LabrynthMEMBER

    If you run a cash flow and remove the NG component it can turn a neutral holding into a negative difference of $5,000. This is assumed on a purchase price of $600k and earning $600 a week in rent.

    Negative gearing helps people hold loss making investments while they wait for capital growth. By removing the negative gearing component it makes it harder for mum and dad investors to build a portfolio.

    $5,000 isn’t a lot in the grand scheme of things but many investors who are stretched rely on the NG to hold the property. Negative gearing is about cash flow.

    If negative gearing was abruptly removed you would see capitulation and a crash as many investors wouldn’t be able to hold onto their investments. Negative Gearing is a big deal and its removal will damage a lot of boomers.

    Remember, 5% of the property transactions dictate what the other 95% is worth.

    To remove negative gearing the only way to make it happen is to grandfather all existing negative geared properties into perpetuity, as the rents alone will eventually extinguish negative gearing as the property moves into a positive cash flow state. To avoid people continuously redrawing on the loan, it should be enacted that after 5 years of negative gearing being grandfathered it is only applicable to properties that have a principle and interest loan (no interest only loans).

    Its not ideal but it is the only way to remove negative gearing and not destroy the market.

    • I don’t think anyone is talking about removing it straight up, of course any change will be grandfathered.

      Negative gearing helps people hold loss making investments while they wait for capital growth. By removing the negative gearing component it makes it harder for mum and dad investors to build a portfolio.

      And this is exactly what is wrong with the property market. Investors buying up existing homes in convenient locations and pricing young families (their children ffs!) out. This is exactly what we need to curb. ‘Mum and Dad investors’ shouldn’t be leveraging up and putting their entire savings into a single highly overpriced asset.

    • “By removing the negative gearing component it makes it harder for mum and dad investors to build a portfolio.”

      So? What’s your point? That being able to afford a loss-making investment property is somehow an inalienable right? And not only that, but that governments should support this parasitic behaviour through the tax system?

      (And I love the terms you use: “mum and dad investors” and “build a portfolio”. So emotive. So attuned to the Australian zeitgeist. And so much more palatable than “greedy speculators” and “leech off the taxpayer.)

      • +many…

        Negative gearing helps people hold loss making investments while they wait for capital growth. By removing the negative gearing component it makes it harder for mum and dad investors to build a portfolio.

        @Labrynth Seriously? You have to be a bigger moron than your so called mum and dad investors to make that statement.

        Why should people hold loss making investments? It is against every tenement of investing.

      • +1 most mum and dad investors believe losing cash every month in the hope of capital gains is a solid investment strategy. Unfortunately this has worked for well since the late 90’s.

      • Love ‘Mum and Dad’ investors.

        Kerry and Ros Packer, Rupert and whoever Murdoch, Robert and Janet Holmes a Court, Richard and Jeannie Pratt – Mums and Dads all, building family businesses to provide for their children.

      • +1 mum and dad investors should build a business or sod off – they aren’t investing they are rent seeking and it’s subsidised by the tax payer.

    • Yes,

      There is no way the changes will not be grandfathered, if they happen of course.

      The reason is that even grandfathering is likely to soften the market for existing houses.

      But a quarantine approach and restricting it, in future, to new housing may be worth a shot.

      The best approach and most politically palatable approach is to.

      1. Reduce the restrictions on the use of land on the outskirts and inner areas – especially on existing transport routes.

      2. Encourage states to introduce better ways of funding the servicing of new development – eg MUDs.

      When supply is responsive and capital gains merely track income, negative gearing of every flavour will shrivel up as an investment strategy.

      • You are spot on Pfh007. Reforms of that nature are first best and should be the policy focus. But what are the chances? And in the absence of such reform, it makes no sense to juice demand via NG.

      • Thanks, Pfh007

        You said it first.

        Everything that is “good” about negative gearing is conditional on housing markets having elastic supply.

        There are numerous policies that would in fact be beneficial in their effects instead of destructive, IF housing supply was elastic.

        FHB subsidies, for example. Or low interest rates. Or mortgage tax deductibility.

        When supply is inelastic, ALL these things merely push prices up leaving no-one any further ahead except property rentiers and the finance sector.

        The same goes for upzoning too. All it does is reduce the amount of space people get for the same money. Unless there is no UGB and land prices are systemically low. In this case, higher density development will result in lower prices, but the land prices are so low to start with, there is hardly the need to sacrifice space.

    • Why would rents still go up if NG is removed? If those renting at the top of the market become buyers there will be no one that will fill that void. These are the properties that can least afford to be on the market empty.

    • I’ve noticed a lot of people, politicians included, make specific mention of “mum and dad” investors. I first heard it used after Telstra 2 shares tanked. Do people really believe that mums and dads should be exempt from negative moves in investments they chose to make, or exempt from changes in government policy that everyone else has to accept?

    • “Its not ideal but it is the only way to remove negative gearing and not destroy the market”
      From my perspective (whatever that matters) the market has been destroyed for a decade already.

    • Yes. And what could be more important than maintaining prices at current stupid levels and protecting the last in the line of greater fools at the expense of those who didn’t have the initiative to be born earlier. Ffs.

    • sydboy007MEMBER

      Might taake a bit longer for a bump like that to occur this time purely because house prices are so far out of reach for most FHBs.

      But another nail into the NG conffin I hope.

      Not sure if Ponzi Joe has the ticker to do it though, but hoping to be surprised in a good way during the budget.

  7. Has anyone worked out where the SBS or Louis Christopher leak came from?
    Who in the coalition is pushing NG for new-builds only? Is Joe on side? Why doesn’t someone just ask him?

  8. Any word on whether any of this analysis is being conducted within Treasury at the moment? Surely there’d be a leak somewhere. If quarantining was on the cards it could explain some of the present investor fever. Insider trading that ends up snowballing………get in before they close the gate.

  9. There has been a long and sorry history of political advocacy by the Australian Housing Industry Association on housing issues, as I explained way back late 2007 with “A Need For Clarity” …

    http://www.demographia.com/p-hia.pdf

    The sad reality is that the land-bankers call the shots in the industry associations.

    The ordinary members get taken to the cleaners and their interests and those of the wider public are not represented.

    The industry associations … including the lead organisation the HIA … should be focused on land supply and infrastructure financing … and asking why new starter stock is NOT going in well below $1,000 per square metre all up (serviced section and construction) on the fringes of the Australian metros.

    It is that simple.

    The Andrew Atkin THE REAL DEAL poster illustrates the extent of the problem in New Zealand. Where is the Australian version ? …

    http://2.bp.blogspot.com/-Wvy3jZaQ3rs/UTEmx-GDJ-I/AAAAAAAAAXE/mA3sBLWlMho/s1600/the_real_deal.JPG

    It is well past time the Australian industry associations had a major sort out … and started representing the wider public and their own members interests.

    Hugh Pavletich
    http://www.PerformanceUrbanPlanning.org

  10. Where are the thousands of fee-paying non-landbanking HIA members?

    Where are the builders, the plumbers, the chippies, the sparkies, the roofers, the tilers, the brickies, demanding their association support NG for new-builds only

    Why aren’t they cancelling their HIA membership enmasse?

    We need a ute-driven coup d’etat of the landbanker-controlled HIA

    • They’re too busy on the treadmill Pat. Although it is school holidays, so they would have parked the ute for two weeks, rolled out the recent Landcruiser Sahara, hitched the $70K speed boat on the back and headed for the $100K cabin on the Murray. And all this on an ATO declared $70K worth of earnings!

      They obviously don’t reckon they have it all that bad. For such a loose, fragmented group they’ve certainly done well to protect their patch. A once in a lifetime credit boom helps.

    • The Patrician … it is actually outfits such as the HIA that prop up the incompetence within the Local Government sector.

      Our Local Government sectors in Australia and New Zealand are very much modelled on the British system. The UK Daily Mail investigated this a few years back … “The Great Inertia Sector” …

      http://www.dailymail.co.uk/news/article-1289702/Public-sector-inertia-council-office-employees-month-sickies.html

      As you correctly state, it is well past time ordinary members woke up … and took control of the industry associations. They are a disgrace.

      Hugh Pavletich
      http://www.PerformanceUrbanPlanning.org

  11. Negative gearing only pays dividends if the asset price rises. It only rises if there is a scarcity. Positional goods involve scarcity but the future premium should be incorporated at the outset.

    House prices rise because governments create scarcity through their regulatory policies. Taxing those capital gains involves massive changes to the tax code and is a second best solution. There is no negative gearing in Germany or Texas because governments do not create the conditions whereby that approach makes sense.

    • Germany’s population growth hasn’t been anything like Australia’s recently.

      By all means get rid of negative gearing and put LVR caps on second, third, fourth IP….

      But why don’t we regulate immigration to the extent that it matches with new housing supply.

      Tough I know.

      • “But why don’t we regulate immigration to the extent that it matches with new housing supply”

        Yep that too.

    • There is no negative gearing in Germany or Texas because governments do not create the conditions whereby that approach makes sense.

      The only other countries that have NG as we know it are NZ and Canada.

  12. Why do the AFR go to the HIA on this every time? Why don’t the AFR ask for comment from the Master builders association or the construction unions for once?

    • Untouchables!

      The discrimination argument has been seen before i.e. ban on property, therefore ban on shares and other eligible businesses etc. Funny how they don’t question the interest rate discrimination on the ‘business’ of property investment as compared to others! If they want to call it a business, pay business lending rates of 7-9%!

  13. Unless at least allowed a long run off period on current investments, restriction of neg gearing is political dynamite.

    If people are to fund a rtirement they have to save and invest. What do they invest in? The most comprehensible to an ordinary family is another house.

    Maybe it ought be one property per individual or a maximum of $5,000 loss per annum or a declining scale of allowable losses.

    All those mums and dad’s investing their savings are going to spend them or leave them in the fullness of time. If you cut the pensions the oldie investors will have to spend more and leave less and that will hurt the young people of today, who everyone is so concerned about. The savings required to fund a long retirement is one of the causes of the problem in a roundabout sort of way.

    • If people are to fund a rtirement they have to save and invest. What do they invest in? The most comprehensible to an ordinary family is another house.

      Yes there are a dearth of investments in Oz and property can be a good investment. The problem in Oz is that the model of investment is unsustainable. Housing investment has become all about cap gains and NG has allowed people to hold loss making investments.

      Maybe it ought be one property per individual or a maximum of $5,000 loss per annum or a declining scale of allowable losses.

      Why do you need NG??? I don’t understand?? Correct the distortions and invest in something that makes money.
      A housing market where you are 0.5% (or more ) positive geared and positive cash flow at 100% LVR works just as well as an investment (think of it as an indexed annuity).

      If you cut the pensions the oldie investors will have to spend more and leave less and that will hurt the young people of today, who everyone is so concerned about.

      Really? Why should everyone be leaving something? Fix the system, the young will take care of themselves.

      I don’t care about my inheritance but it shits me to no end that it is so hard to buy a house. I want to do it on my own feet, not as a result of where I was born.

      The savings required to fund a long retirement is one of the causes of the problem in a roundabout sort of way.

      We have many ways to save. Again, you can have a good property investment with yield and minimal cap gains.

      • The problem in Oz is that the model of investment is unsustainable. Housing investment has become all about cap gains and NG has allowed people to hold loss making investments.

        That’s it isn’t it.

        No one buys yield, no one forces downward pressure on prices to enhance the yield, because policy has been a backstop for not having to worry about yield.

      • That’s it isn’t it. In a nutshell, yes…

        No one buys yield, no one forces downward pressure on prices to enhance the yield, because policy has been a backstop for not having to worry about yield.

        You need to understand what yield is first 🙂 … easy credit and the ability to withstand losses via NG means that you can hold the property while making a loss and the expectation of many drives the market, backstopped as you said by broken policies.

    • What do they invest in? The most comprehensible to an ordinary family is another house.

      See.. this statement right here, reeks of welfare dependency.

      “I’ve been coddled my entire life, i don’t know what to do!!. You’ve got to keep this system for me… stuff who else it is harming!!”

      So instead of what, those $13,000 p.a. loses NG’ers are racking up, they could salary sacrifice $13,000 p.a. to their super fund.

      If they don’t like shares, they could invest them in bonds.

      UBS bond funds has 6.64% over 5 years

      13,000 a year, x 85% AT, is an increase in their super of $160k.

      At 4% drawdown, is an extra $6402 p.a., or $246 per fortnight.

      Increase the retirement age by 5 years, and it becomes an extra $443 per fortnight.. on top of 5 extra years SGC, and 5 years less of retirement to fund.

      That’s taking a very low risk option, you can of course invent something.. you know, create wealth

  14. Housingadvocate

    I work in the property management industry and have done for 26 years. I see the market conditions and the situation with tenants first hand. Scrapping NG and taking all of the cheaper priced homes out of the rental market (or even reducing them) will be a disaster. I don’t care what the HIA, the developers of new properties or any one else who thinks they know all about the market has to say about it. And the LNP Government would like to see developers with new properties capture the investors market, as they most certainly are LNP voters. The fact is this……..low priced, non brand new homes, create the affordable end of the rental spectrum. Not every tenant can afford $500 pw for a new home as a rental. We need the lower priced properties in the 220-400 pw range. Limit investment properties to Brand New, and the market will turn to crap. Fact. if you don’t believe me, wait and see what happens. Please, research before you make comments and try living in reality like low income people do in the rental market. Also, the biggest tax deductions are with brand new property……der….any idiot knows that. If you dont know it, go back to your accountant and get educated. So the biggest tax deductions the Govt is giving out, is on brand new properties, as we all know. For goodness sake!

    • “Please, research before you make comments and try living in reality like low income people do in the rental market. Also, the biggest tax deductions are with brand new property……der….any idiot knows that.”

      So why do 95% of investors buy existing dwellings?

      Please explain how an investor buying an existing dwelling increases housing supply.

    • @housingadvocate

      You’re assuming the house prices can’t fall to match the rental yield …

  15. Housingadvocate that is a very good article.

    Flyingfox where is that you want to buy a house?