For the record: Putland on negative gearing, CGT and the FHOG, 2003

In the last two years, all Australian states and territories except the NT have decided to reduce or terminate the First Home Owners' Grant for established homes. (The NT pays a premium if the home is new or outside the designated urban area, but has not reduced the grant below $7000 for established homes). One option under consideration for the 2014 Federal Budget is to disallow negative gearing for future purchases of established homes, while continuing to allow it for new homes and grandfathering past acquisitions. The following quotes may therefore be of interest.

Letter in the Sun-Herald, 20 July 2003, p.18 (with photo):

Put tax help where it matters

A Macquarie Bank study (“Positive alternatives to negative gearing” The Sun-Herald, July 13) has found property investors are driven not so much by negative gearing as by the concessional rate of capital gains tax.

Defenders of the system would claim that this concession, like negative gearing, increases the supply of housing and helps to contain prices and rents. But this is true only in so far as the tax concessions encourage new construction. Investment in established property merely adds to demand and drives up prices.

So if the Howard government really wants to do something about housing affordability, it will disallow tax concessions on future purchases of established homes but retain the concessions for new construction.

Gavin Putland
. . .

(The editor moved the title “Positive alternatives...” outside the parentheses. I have put it back inside because it's the title of the newspaper story, not the study.)

Letter in the Daily Telegraph, 30 September 2003, p.18:

Taking homes for granted

Because the most expensive suburbs are long established, the super-rich are more likely to buy established homes than new homes. So one way to discourage the super-rich from exploiting the first homeowners' grant is to make the grant available for new homes only.

This policy would also encourage building, which would increase the supply of housing and improve affordability — instead of simply driving up the prices of established homes.

Gavin Putland
. . .

Letter in the Sydney Morning Herald, 13 November 2003, p.12:

Opponents of negative gearing, such as Adam Blinman (Letters, November 12), keep saying that it pushes up home prices by stimulating demand from investors. Defenders of negative gearing keep saying that it encourages the building of rental homes, thereby keeping up the supply and containing rents.

In the middle, I keep saying that if negative gearing were disallowed on future purchases of established homes, but still allowed for new construction, it would give even greater encouragement to building while removing the upward pressure on prices of established homes.

G. R. Putland
. . .

Letter in The Australian, 17 November 2003:

Bubble-plagued economy

. . .

Critics of negative gearing — most recently the Reserve Bank — keep saying that it pushes up home prices by stimulating demand from investors.

In reply, defenders of negative gearing keep saying that it encourages building of rental homes, thereby keeping up the supply and containing rents.

In the middle, I keep saying that if negative gearing were disallowed on future purchases of established homes but still allowed for new construction, it would give even greater stimulus to building while removing the upward pressure on prices of established homes.

My suggestion is met with silence. Which shows that the purpose of present policy is not to encourage building, but to prop up prices for the benefit of established investors.

G. R. Putland
. . .

Letter in the Age, 5 December 2003:

Negative gearing and interest rates

By allowing property investors to claim deductions in excess of rent (“negative gearing”), the tax system focuses attention on capital gains instead of income, allowing prices to grow out of proportion to rents. Consequently, Australia's property investors now claim more in rental deductions than they declare in rental income, and take out more than 40 per cent of new loans for housing.

This demand from investors drives up home prices at the expense of first-time buyers. Inflated home prices lead to unaffordable wage claims and serve as collateral for loans that expand the effective money supply. These influences are inflationary and put pressure on the Reserve Bank to raise interest rates.

The effect of negative gearing on housing affordability was noted by the Reserve Bank last month. But Prime Minister Howard and Treasurer Costello stuck to their guns, claiming that negative gearing encourages building of rental homes, thus increasing the supply of accommodation and containing rents.

What they don't say is that the incentive to build would be greater if negative gearing were disallowed for future purchases of established homes but still allowed for new homes. The same reform would stop investors from driving up prices of established homes. We know that Howard and Costello understand this, because the temporary extension of the first home owners' grant was available for new homes only. But they are not interested in doing the same with negative gearing.

So on Wednesday morning, the Reserve Bank raised interest rates again. Thanks, John. Thanks, Pete.

G. R. Putland
. . .

“First they ignore you, then they laugh at you, then they fight you...”