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.”

  • The trick with changing the Tax mix is to do it when firstly, we aren't relying on the construction industry to shoulder the heavy lifting in the terms of growth to our economy and secondly, so that the price bubble fizzles out rather than pops.
    We have done so much in terms of freeing our economy from distotions, however the real estate and construction category has been left out of serious reforms, which has only served to increase its effect.
    This will be interesting!

  • I can remember friends buying housing blocks and keeping them for many decades, and, simply giving all the details to an accountant to pay the bills as needed. A few decades later discovered they were now very wealthy. Its now impossible to buy a housing block and keep it vacant for more than a couple of years as the covenants in subdivisions now do not allows a weed filled block to exist.

    230,000 thousand underused dwellings in Melbourne?
    I suspect some people have been burned by very bad tenants and or they have enough capital gains happening with out the need for tenants. Some people do buy houses and sit on them and wait for the Council to see reality before they put in an application for development. All real estate is a long term investment. With investment in business generally becoming harder every year people have got to park their money somewhere. Free up the business sector and see the capital run away from housing very quickly.

    Many Australians are more wealthy than they were in the past, and, they can afford to live in two and three different houses. Do we stop them living in more than one house; and, also tell them they can only own two long sleeved shirts at any one time. They worked hard to create those houses they did not steal them.
    Count our blessings that life is better than the very poor times of fifty years ago.
    If you are young and healthy go out and enjoy Australia; it has never been as good even for the poorest.
    If you have low skill levels you may need to work more than 7 hours a day.
    Enjoy achieving and do not waste your earned money on garbage. "Half your bloody luck".

  • A damning indictment of the incentivizes created by our current tax regime – rents are ridiculous and housing undersupply is a perennial staple of the mainstream media, yet we have hordes of apartments sitting unoccupied in the major cities…

  • 'Negative Gearing Creating Masses of Vacant Apartments'? Not really. Mostly it's caused by foreign investment and a domestic flight to quality and a desire by local governments to create rateable property. As for all the nonsense about negative gearing, it's actually just a way for individuals to enjoy the same tax conditions as companies: that is to set losses against profits (in this case, income). So, the real headline should read 'greedy and corrupt local authorites create masses of vacant apartments'. Just saying.

  • Such commentary from professors and economists misses the point that the two issues are less related than they propose. Investors have a choice to invest in whatever they wish or believe will offer them a better return (whether growth or regular income) while minimising complication. They are not responsible for issues such as new or affordable housing stock and housing social factors and may choose to invest in residential units, houses, commercial property, shares, gold….etc.

    'Negative gearing' is not a policy, just a strategy and coined phrase based on the normal right to claim expenses, including interest, against income on an investment – positive gearing is a more sensible target outcome if possible. Typical rental returns of only 3% for residential property hardly make the rental income the primary purpose so more investors will search for properties of likely capital growth, as we know never guaranteed.

    There are quite a few exceptions to the investment property generalisations. What about a family which decides rather than having one expensive house, they prefer to share living across two more modest houses in two locations? One is an investment property in the eyes of the tax department, but certainly not so for that family; rather is considered an unreasonable impost for those circumstances.

    A higher level of empty stock will have resulted from the growth of self managed superannuation funds searching for more straight-forward investments.

    Rather than just blaming or trying to change negative gearing (which is not a housing subsidy – a first home buyers grant is a subsidy) or capital gains tax in the pursuit of more stock of affordable housing, I believe the latter needs to be tackled far more broadly.

  • You can only claim a tax deduction if the property earns income (rent), so I don't see how negative gearing and empty properties are correlated.

  • So what the researchers are really pushing for is a social housing scheme funded by institutional super funds. With capital gains tax benefits redirected to assist. Wasn't this effectively tried under the national affordable rental housing scheme 5 years ago?. It's a hard sell to investors that capital gain of such properties will be equivalent to private investment. Unless of course the schemes distort the market by getting access to surplus government land or exemptions from the massive state and local tax levies on new development. If that stacked up financially it would of already been done. The fact is that superanuation is there to create retirement income for members, not to be a slush fund for well meaning socialist policy makers. When considering the tax concessions to negative gearing investors you also need to consider the capital gains return to the government over time. A property held in Sydney for ten years will typically return much more capital gains tax that what was received by the investor in concessions. The other benefits to jobs and the economy are also significant. Young people without jobs can't buy houses. But these are just the silly arguments offered by the property industry that are noted but not elaborated upon in the article. That would bring balance by presenting both sides.