Tax concessions are leading residential investors to pour excessive amounts of money into the wrong types of dwellings, two leading academics say.
Pointing to data from the most recent census in 2011 showing that around 120,000 dwellings lay vacant in the Sydney metropolitan area alone and that the number of unused and under-used dwellings (including those used for short term rental accommodation) amounted to 238,000 in Sydney and 230,000 in Melbourne, University of NSW research associate Dr. Laurence Troy and City Futures Research Centre director Professor Bill Randolph argued recently in the Sydney Morning Herald that the availability of negative gearing and capital gains tax discounts was driving a phenomenon whereby excessive levels of investment were going into small apartments with high levels of potential for capital growth.
By contrast, insufficient levels of investment were being allocated toward outer urban properties with lower capital growth profiles notwithstanding attractive rental yields on these investments, Randolph and Troy said.
Stressing that the situation has likely deteriorated further in recent years amid massive levels of investment going into apartments, Randolph refers to current arrangements as ‘a housing tax and subsidy system which supports wealth creation for the fortunate…not housing need.’
“Little of the total negative gearing subsidy goes into new housing production and most is supporting investment by higher income investors in higher value housing, pricing out lower income home buyers and inflating property prices generally,” he said.
“The subsidy that does support new housing supply overstimulates the delivery of a housing product tailored to small scale higher income investors - essentially one to two bed units at full market price in higher value locations where capital growth is highest.
"Consequently this part of the market is over-supplied, leading to a distorted housing supply response. It (the subsidy) does not help address the need for moderate sized house property such as town houses for downsizers in local suburbs or family sized apartments which, as the Grattan report on housing a few years ago showed, are in demand, but which data show are a small and declining part of new housing production.”
Troy and Randolph's comments come as calls for either abolition of, or further restrictions upon, the use of negative gearing along with the 50 per cent discount on capital gains continue to gather momentum.
Renowned economist Saul Eslake, for example, refers to current policy settings in this area as part of 50 years of housing policy failure in which governments have stimulated demand whilst simultaneously failing to address critical supply side constraints.
With around 93 per cent of all loans made to residential property investors related to the purchase of established rather than new dwellings, Eslake says the idea that domestic investors contributed to the creation of new housing supply was one of several fallacies being peddled in terms of housing policy today.
Instead, he argues, domestic investors are simply pricing new home buyers out of the market.
Moves to restrict or abolish negative gearing are, however, opposed by property industry lobby groups.
Randolph says negative gearing and the CGT discount should be replaced by measures which deliver a meaningful impact upon housing affordability.
“The current ill-targeted housing tax and subsidy system should be refocused over a period of five to 10 years so that the subsidy effectively spent on negative gearing is redirected to new housing of which at least half must be targeted on an affordable product,” Randolph said.
“The best way to do this in order to ensure that affordability is retained over the long term is for this component of the subsidy to be targeted on support for super fund investment in large scale and long term rental through community housing providers as long term landlords.
“In other words, we need to wean the subsidy away from the current higher income baby boomer investor seeking wealth creation and into a proper housing policy that supports the production of a new large-scale and long-term affordable sector funded by institutional investors for those who need such housing.”