If negative gearing reform will crash property, why do banks support it?
Fairfax’s Clancy Yates is today pondering why the banks have been silent on the negative gearing debate, and questions whether reform might actually be good for them:
Lending to property investors has been the fastest-growing part of the loan market in Australia for the past few years, and mortgages are the driving force behind bank profits…
It seems curious, then, that the banks and their bosses have been largely absent from the recent public discussion about property taxation…
The $1.5 trillion home loan market is the engine room of Australian bank profits, accounting for about 65 per cent of all loans in the banking system.
Loans to property investors make up a bit over a third of all mortgages, and it’s been a rapidly-growing.
…reining in negative gearing could also have actual benefits for banks, by reducing some of the risks in the financial system.
The view of global regulators – though not necessarily banks – is that housing investor debt is riskier for banks than owner-occupier loans…
Giving people less incentive to borrow heavily for property purchases could ultimately be good for banks, even if it did slow down their profit growth a bit.
While the banks have been silent since Labor announced its policy, there is near universal agreement among the Big 4 that property tax concessions in Australia go too far and need to be reviewed.
In mid-June last year, Westpac requested the government reform the tax system to remove the bias away from property speculation:
The current CGT discount was introduced in 1999 and allows individuals to discount a realised capital gain by 50 per cent provided they have held the asset for 12 months. Superannuation funds are also able to claim a discount of 33.3 per cent. Prior to the introduction of the CGT discount, indexation and averaging applied to capital gains meaning that only real gains were subject to tax.
We note the concern that the current 50% discount after only 1 year is not appropriate as it does not strike the right balance between removing the impacts of inflation, while discouraging speculative ‘asset flipping’ behaviour. We believe it is appropriate that the tax arrangements for long term savings neutralise the effects of inflation on asset prices, so that only real increases in income are taxed.
However, we recommend considering an adjustment to the current arrangements for capital gains to align the tax treatment with other savings options.
This would support the goal that investment decisions are not taken on the basis of after tax outcomes and would improve overall equity between investors at differential marginal tax rates. It may also moderate the concentration of debt-funded risk-taking in property investment…
We agree with the observations in the Tax Discussion Paper that negative gearing, in itself, does not cause a tax distortion. However, it is important to note that negative gearing does have an impact as leverage allows more people to enter the (housing) market…
ANZ chief, Mike Smith, then entered the fray, claiming that “negative gearing doesn’t feel right”:
Mr Smith said the government should look at negative gearing – which allows property investors to claim interest payments against their income – as part of a broader review of the tax system.
“It is somewhat ironic that we live in country which encourages borrowing and discourages saving, that doesn’t, somehow, feel right,” he told the Trans Tasman Business Circle lunch on Wednesday.
“But I don’t think you can look at negative gearing in isolation, I think the whole tax system needs to be looked at.”
And in August last year, CBA chief, Ian Narev, called for a review of negative gearing:
“This is one of the things that needs to be looked at broadly as part of the overall tax review,” he said.
Mr Narev said negative gearing undoubtedly had an impact on the housing market by boosting demand from investors…
However, he said the concession should not be looked at in isolation.
“In the structure of the Australian property market, where you have a high degree of investor borrowing… undoubtedly negative gearing is a factor,” he said.
The banks’ comments follow those of the RBA, the Murray Financial System Inquiry, Audit Commission chair Tony Shepherd, and the Australian Treasury in calling for a review of Australia’s property tax rules (i.e. negative gearing and/or the CGT discount).
All of which makes the Turnbull Government’s fear-mongering about house prices all the more absurd.
unconventionaleconomist@hotmail.com
