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It’s incredibly frustrating to see the hard time housing is being given in Australia.

Back in mid-2012, the mother off all resource construction booms was coming to an end. Enter new home construction, which put on the longest and biggest building cycle in Australia’s modern history. Within and outside the industry, that boom generated millions of jobs across the sub-contracting, single trader, small business, medium business, volume builder, and large manufacturer and supplier community. An aggregate sum of activity worth some $150 billion per annum was born.

There was something in it for all political parties, really!

Negative gearing provisions – an indelible part of Australia’s tax system, rather than a tax ‘break’ as some ignoramuses refer to it – played its part in helping Australia escape its first recession since the early 1990s. To put it another way, the negative gearing of residential property was an integral component in Australia’s housing industry keeping the economy out of the quicksand.

Yet in some quarters these days, residential property investors are treated like lepers. To hear some speak on the matter, you would think all these investors negatively gear – but they don’t. Their properties are negatively geared forever, but the fact is that after five or six years maximum those properties that were negatively geared turn positive. Everybody who owns investment property is believed to be a rich toff gouging out the eyes of lower/middle income Australia. The substantial number of middle income families, teachers, nurses and the like who have one investment property are entitled to feel somewhat peeved at this falsehood.

It’s about time we junked the negative gearing criticisms and then appropriately discard this long-standing component of Australia’s tax system as a sideshow when it comes to addressing Australia’s housing affordability challenge. For people who don’t like that, get out more and learn about Australia’s property and residential construction markets.

During the latest new home building cycle – again, the longest and largest in modern Australian history – investment in new housing peaked at between 30 and 40 per cent of all housing investment. It still accounts for over 20 per cent of all residential investment. Investment activity, aided by negative gearing provisions, helped save this economy from recession.

The above figures might seem high because a prominent argument against negative gearing is that it doesn’t materially add to new housing supply. Bollocks! There is an often touted myth – call it a ‘false fact’ – that less than 10 per cent of residential investment lending goes to new housing. Wake up, naysayers! It’s not a full count. The ABS measures all lending to owner occupiers for new property, but they don’t do this for investors where the ‘count’ is only partial.

Think about it intuitively if you are suspicious. We’ve just been through a very big construction cycle for detached housing and the largest boom in medium/high density construction in our history. Does it seem feasible that domestic investment accounted for less than 10 per cent of that? Of course not. We all know that foreign investment played a massive role in the current new home construction cycle, but it didn’t weigh two and a half times King Kong! Domestic investment in new residential property was a vital and substantial participant and negative gearing was part of that.

So let’s give investors a bit of a break. They are not lepers. Most of them are just trying to make their way in the world. Many of them have traditionally been teachers or shift workers of all sorts of professions who decided to take the punt and work extra shifts as a deliberate decision to fund their investment. If you think that point is inaccurate then again, you need to get out more.

A first home buyer couple in Sydney can spend one-third of their after tax income paying for the government taxes and charges levied on the property they bought. Where is that headline when the ignoramuses in the room are telling us that negative gearing is the Darth Vader of Australian housing?

Some participants in the housing affordability debate really need to take a Bex so they can settle down and reconfigure their focus. Demand and supply side factors are both important, but right now it remains a fact that new housing is the second highest taxed large sector in Australia’s economy. To put in more bluntly, building a roof over the heads of Australians is taxed higher than all but one other sector in the Australia economy. That’s got bugger all to do with negative gearing, but it has everything to do with why Australia has a housing affordability challenge.

It’s all about the cost of supply. If you don’t address that, you get nowhere. Love or hate negative gearing (and capital gains tax concessions), the need to reduce supply costs comes first.

The Rudd Labor government recognised this fact through its housing infrastructure fund policy. The Henry Tax Review, which was commissioned by the Rudd Government, reached the same conclusion that reducing the costs of housing supply has to come first. I don’t like, nor agree with all aspects of the Henry Tax Review, but it’s a bloody good read for us economic sops! It remains the best starting blueprint this country has for serious taxation reform. It would be hard, unpopular work, just like all serious economic reform is and the report comes from the opposite side of politics to the current government. So nothing will happen.

The next time somebody says to you that we have to cut negative gearing and capital gains tax concessions because that is the answer to Australia’s housing affordability challenge, ask them this question: what would that do to prevent Australians’ paying around 40 per cent of the final price of a new house in taxes and charges to local, state and federal governments?

 
  • One myth about negative gearing is that it represents a tax ‘break’.

    All negative gearing means is that those who invest in property (or any other asset) incur more tax-deductible expenses associated with their investment (interest, maintenance, depreciation write-downs etc.) compared with what they receive in assessable income (from rent etc.). They are Ok with this because they believe that their asset will appreciate in value and that they will derive a capital gain from the asset.

    This is not a tax 'break'. In fact, it is a fundamental principal of tax law that you are taxed on your assessable income and that you can deduct from that any reasonable expenses in gaining or producing that income. It's simple and fair.

    Moreover, if you did remove the ability of investors to deduct costs and expenses in excess of any income earned associated with the asset in question, you would also (to be fair) also go the other way and not tax any income on that asset in excess of costs and expenses incurred. That is a basic principle of fairness. If you are not going to allow any net losses (expenses which exceed income) on an asset to be claimed as losses and written off against a taxpayer’s other income, you cannot tax any net income gains they make from property.

  • Excellent, well put Dr. Dale. While some of the language could offend some sensibilities, I appreciate that it does express the frustration which has to be felt by many property investors at the constant and mainstream accusation that investors are the problem for first home buyer affordability. This mainstream media and political divisiveness around negative gearing argument and investors driving up affordability is a cop-out on solving the real issue, simply because it presents a more emotive argument. Nor does this argument give any gratitude to the will of investors that contributes, even if only a little bit, to driving a strong Australian economy.

  • Just what we really need…a considered, thoughtful contributiion that doesn't fuel unproductive posturing, written without recourse to schoolyard invective.

  • The only problem is, despite all the sensible discussion above, the Left love the idea of tearing down negative gearing as a vote grab, not because they genuinely believe in the need for it. So it will be part of Labor's platform coming into the next federal election. An election that due to Turnbull's poor performance they can't possibly lose.

  • You present some good counter arguments to bagging detractors of negative gearing Dr. Dale. But you seem to have left out a few enormous factors on both sides of the supply & demand equation.

    On the demand side… nett rising immigration is an enormous factor for Victoria with 88 000 more people needing housing in just 2016. Also on the demand side is the attraction to the perceived job centres associated with big cities.

    And this in turn leads to the supply pressures on land near and in cities because of the greater distances of travel (and travel time) to those work centres from outer suburbs.

    Lastly; although there is a lot of land in Australia, there is no levy (I know… another demand cost) associated with property sales specifically to create fast rail from satellite cities to Melbourne. Is that what you were hinting at when you stated that we need to 'fix' the cost of supply? I can't see governments forking out any of their present (rather large) tax impositions on property sales any time soon, can you?

  • Well said! I too find it strange when a politician calls for an 'end to the negative gearing policy', as it it was an initiative developed separately from basic tax treatment of income and expenses. My understanding is that 'negative gearing' was a term coined by financial advisers rather than ever being a policy, so how could it be abolished? What about the same logic for investments in shares or commercial property etc.? With low interest rates the benefits of negative gearing are far less significant as is the effect it would have on those new to the market. Far more sensible to aim at positive gearing investments anyway, but then any interest expense remains tax deductible as a cost of the investment as well! As you mention, ignorance and attention seeking fuels the debate.

    • "The lady doth protest too much, methinks" Hamlet by William Shakespeare.
      Negative gearing and discounted capital gains tax for residential housing as an investment vehicle would be working very well for most of the membership of Dr. Dale's Housing Industry Association. There are many 'repair and maintenance' jobs carried out on such investment properties that are claimed as fair wear and tear deductions when in fact they are really capital improvements that reap greater gains when sold. The invoicing part is pretty easy to fudge. Whether our rampant plunge into residential property investment is actually beneficial to all Australians, particularly those young families who are desperately struggling to buy a house to live in as a family rather than to use as a tax advantaged leveraged investment vehicle, is really not so clear and despite the abusive and highly deprecating tone used in this article it does not diminish the many alternate views that are held on this matter.

    • Not being one to apply negative gearing on investments perhaps allows me an unbiased view; just stating the fact that in itself it is not an actual 'policy', yet that is the way it is being debated. Of course tax laws and policies related to any investment are more broad in their cover of all income and expenses and interest as an expense can be claimed whether the investment has borrowing levels geared that may result in a loss or a profit. Years ago a capital gain used to rightly allow a discount related to the portion linked to inflation as the value of the asset had no real gain if it only kept up with inflation. To simplify that equation a discount on the tax rate replaced the previous way it was calculated. In higher growth that can be an advantage, moderate growth about the same as beforehand and low growth actually a disadvantage. Differentiating capital improvement and operational expenses is fairly simple so if some investors are mixing those up for selective gains I see that as an entirely different issue from this article, being one of tax fraud.

  • Met a client who asked me to look at a property to see if we can add another house in the backyard.
    The tenants were from the Middle East, and, politeness requires they should invite you in and offer you some tea. The house was spotlessly clean and tidy. They asked what the landlord was planning to do, she explained that they were planning another house, but it would take two years of paper shuffling before they could start building; and what would happen is they would separate the existing house from the rear by a new fence. The tenants explained that they were hoping in two years’ time to have a deposit for a new house; but reducing the back yard to four metre width was not an issue for them if they are still here.
    The tenants reminded me why I work in the building industry. If you grew up in Melbourne the shame of its past was the third world housing stock offered for rent. The worse house in the street was always the rental property. Houses with three generations living on top of each other. When I hear about reducing the number of houses or apartments available for rent I think of the nightmare of the past. The left of the political movement today in Australia think like the Soviet era Party bosses, the workers do not deserve to live like them.
    Any change that reduces housing rental availability and quality will be met with political turmoil. A few dozen people sleeping in the Melbourne CBD streets will seem like the good old days. We are all sailing in the same boat; you cannot sink any part of the boat without all of us drowning. Making thoughtless changes to the provision of housing cannot be undone overnight. Revolutions are always a disaster.
    We have millions of under employed people in Australia. Many working forty hours a week would love to work more hours to provide another house for rental. If we need more affordable houses all we need to do is let those wanting to work the freedom to do so. The restrictions in the economy are the only problem Australia has to face. Stalinist control and thought did not disappear with the death of Stalin, the hat and moustache is gone but he walks in the inner suburbs of our cities.

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