Logo Land Values Research Group: Economics as if location matters Photo

Thursday, April 21, 2011:

More hypocrisy on negative gearing

If the story in the Age on April 21 (“Talks test the water on negative gearing change”) is any guide, any changes that the Gillard government makes to negative gearing rules will be calculated to worsen, not improve, housing affordability. But if you want to know why, don't ask the property lobby.

Negative gearing deductibility is supposed to increase the supply of rental accommodation. But any such effect is diluted to homeopathic levels because you don't have to build a new home to qualify for the deduction; you can simply buy an established home, taking it from a prospective owner-occupant and forcing that person onto the rental market.

If the negative gearing deduction were really meant to make housing more affordable, it would be allowed for new homes but disallowed for future purchases of established homes, in order to encourage construction. But that option apparently isn't on the table.

What is allegedly on the table is a restriction on the number of properties on which negative gearing is fully deductible. The usual suspects will claim that any such restriction will reduce the supply of rental accommodation and raise rents; and without a companion provision to boost construction, these claims will be believed.

Indeed the HIA promptly put out a press release claiming that “negative gearing is crucial to investment in rental housing,” and seizing the opportunity to say nothing about the distinction between new and existing housing.

Then the HIA has the chutzpah to add: “Income from rental properties is assessable, and expenses should be deductible. This is the basic premise of Australia's taxation system.”

But that's not what the negative gearing rules say. They say that if the interest bill on your investment property exceeds the rental income, the excess is deductible against your wage/salary income although it is not incurred in the process of earning that wage/salary income. Meanwhile an expense that is incurred in the process of earning your wage/salary, namely the cost of travel to and from work, is not deductible. That's not a consistent application of any “basic premise”. It's one rule for the gentry and another for the peasants.

Negative gearing hurts first home buyers because an investor can claim a tax deduction for the margin by which the interest bill exceeds the rent, whereas an owner-occupant can't claim a tax deduction for the margin by which the interest exceeds the rental value; this enables investors to outbid owner-occupants for the same property. Limiting the number of homes on which negative gearing is allowed will not remove the cause of the problem, but will merely cause a slight reduction in the number of investors outbidding first home buyers.

The Age further alleges that the government is considering a vendor duty of 4 percent of the sale price for owners of multiple properties. If this duty were levied on the real capital gain, it could be defended as a clawback of an unearned windfall, and would be guaranteed not to turn a profitable resale into a loss. But a levy on the entire sale price has no such redeeming features; it is simply a fine for selling and a bottleneck in supply.

But the HIA's press release doesn't say that. It compares the vendor duty with the “disastrous move to introduce a similar tax in NSW in 2004”, which “led to home building in NSW grinding to a halt”. That's an odd claim to make about a levy that specifically excluded new construction. Of course the press release doesn't mention that exclusion. Neither does it cite any evidence of causation. Neither does it acknowledge that the NSW levy was effectively on the capital gain.

The government and its cronies are allegedly considering these measures “as a way to tackle housing affordability.” That's what they all say.

    Return to Contents