The pros and cons of negative gearing are in the headlines again. The topic generates lots of heat in the mainstream media, but very little light. Once again it is an indication of how opposing ideologies have taken entrenched positions and the public misses out on a worthwhile debate.
Negative gearing allows a property owner to take a tax deduction on the shortfall between the rental and the mortgage of an investment property. It was originally established so the private sector would have some incentive to supply some public housing.
As most people would now realise, it has been spectacularly unsuccessful in this area. Public housing for the marginalised is woeful and getting worse. Australia has consistently been on the list for worst housing affordability of all OECD countries. However it would be amiss to only blame negative gearing for this. Successive government policies over the years have let this issue be another victim of economic rationalism.
In my years of working in the property industry only a small proportion of my buyers are factoring negative gearing into their purchase decision. Inner city investment purchases are probably the main product for it. Statistics support that gearing is not always taken up. Many investors are far more focused on positive gearing – where the rental is in excess of the mortgage. However since the rapid rise of residential property prices in the early naughties, coupled with consistently high interest rates, positively geared investment properties have become a rare beast indeed.
There is probably some worthwhile tweaking around the edges that could improve the system. Instead we have the coalition government standing by it and the greens wanting to scrap it. Capping it is probably a good idea. Allowing millionaires or billionaires to get a tax write off on property is a bit rich. Then only allowing the full concession on new property to stimulate construction also makes sense. Partly gearing existing home purchases then becomes a good compromise.
The main problem is that in Sydney, and possibly Melbourne, home prices are being driven higher by speculators. Some of these are overseas buyers (read Chinese investors), which further inflames certain xenophobic Australian sensibilities. The problem then becomes most levers that a federal government can pull are national, so trying to cool off Sydney may have the adverse side affect of slowing the rest of the economy.
The New Zealand government were able to come up with a sensible policy to cool the rocketing house prices of Auckland. Working with the banks and lending bodies they introduced a 30% deposit on any investor property in Auckland. New Zealand, as well as Australia and Japan, are the only other countries allowing unrestricted use of negative gearing to offset tax losses.
Banishing or maintaining negative gearing will have very little to do with cooling Sydney house prices. Policy adjustments are available to make it more productive – like building more affordable housing. Unfortunately, it has now gone into the same old tiresome debate about the rich getting too much and the poor wanting to eat them.