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Is negative gearing to blame for house unaffordability?

Is negative gearing to blame for house unaffordability?

Some economists have called for it to be abolished and many blame it for Australia’s housing unaffordability. Negative gearing allows investors to claim any losses they incur on an investment property against their personal tax income and is often cited as driving up the price of property by encouraging investors to enter the market.

In 2010, the Henry Tax Review recommended a change to negative gearing to allow only 40 percent of any negative gearing loss to be recognised, but the government did not implement any of the recommendations.

The Housing Industry Association argued at the time that a reduction in negative gearing benefits would negatively impact property demand and worsen rental affordability through a reduced supply of investment housing.

The debate continues

The debate flared again recently, with the Grattan Institute last month releasing a report titled Renovating Housing Policy, in which it argued that Australia’s housing policy is “overdue for a major renovation”.

In addition to negative gearing, property investors also benefit from a 50 percent discount on capital gains tax. According to the Grattan Institute, the combined tax benefits are worth almost $7 billion a year, or about $4500 per property investor.

The Australian Taxation Office lists approximately 8 percent of the population as having an investment property (at the time of writing).

Writing in the Australian Financial Review, the Grattan Institute’s cities program director, Jane-Frances Kelly, argued: “By increasing demand for residential property, these policies help to push up prices and lock may potential home buyers out of the market. Combined with rules that restrict development in established suburbs, higher prices force many households to buy on the city fringe, further away from transport and jobs.”

The rental impact

The Real Estate of Australia (REIA), however, disagreed with the Grattan Institute’s suggestion of reining in the negative gearing and capital gains tax benefits.

REIA president Peter Bushby argued negative gearing is essential because it helps provide rental accommodation. “To remove it would show that we haven’t learnt anything from history,” Bushby said.

“When negative gearing was abolished in 1985 it had disastrous consequences for the property market and for people trying to rent. Rents rose 37 percent across Australia and by 57 percent in Sydney. Thankfully, negative gearing was reinstated in 1987.”

Showing the range of opinions on negative gearing, economist Leith van Onselen rejected the REIA’s assertion that the abolition of negative gearing caused rents to rise, stating in a blog entry that much higher rental growth occurred in the 1970s and early ’80s, before negative gearing was abolished.

The Grattan report found that rents have “increased substantially” in recent years. In the 10 years to 2012, average nominal rents increased 76 percent for houses and 92 percent for apartments.

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