A leading economist has called on Canberra to put an end to negative gearing for new investors as the best way to dampen frothy property markets in Sydney and Melbourne.
In its Stability Review released last week, the Reserve Bank of Australia pointed out that strong demand by investors means that investor housing loans now account for about 40 per cent of all home loans.
The RBA also said for the first time it was working with the Australian Prudential Regulation Authority (APRA) on "additional steps" to reinforce safe bank lending, particularly for lending for investors.
With investor demand surging, and steep rises in Sydney and Melbourne property prices, RBA governor Glenn Stevens last week noted it was "perfectly sound and sensible to ask ourselves whether we might at least lean on that a bit."
But Saul Eslake, chief economist at Bank of America Merrill Lynch says the central bank has made "a very compelling case for the government to consider ending negative gearing for new investors."
He accepts that it is not politically feasible to abolish negative gearing entirely because around 15 per cent of voters are currently taking advantage of negative gearing - a tax regime that allows them to buy assets and deduct the interest costs against other income.
But he says that it would be easy for Canberra to decide that any new investment past a certain date would not be eligible for negative gearing.
Eslake argues that the Reserve Bank has three options for tackling the "unbalanced" housing market.
"They can let the market run, which history has shown is not a good option. Or they can lift interest rates which will cruel the rest of the economy to stop an alleged risk in the housing market.
"The third option is to introduce new macro prudential rules to limit how much the banks lend to certain types of borrower. But the risk here is that the new rules either don't work or that they hurt the wrong people, such as first home buyers."
In contrast, if Canberra decided to curtail negative gearing, it would reduce borrowing by investors, which would mean that investors either paid less for properties or did not buy as many.
Eslake says that some supporters of negative gearing argue that it gives investors the same tax treatment as business.
"This is a nonsense argument", he says. "Unlike investors, businesses don't get a 50 per cent discount on any profits they make when it comes to capital gains tax."
Supporters also run the argument that scrapping negative gearing will lead to a steep jump in rents, as happened after former Treasurer Paul Keating decided to abolish negative gearing in 1985.
"Actually if you look at what happened, rents went up in Sydney and Perth, but they didn't rise in any other market", Eslake says.
"And that was because in 1986-7, Sydney and Perth had vacancy rates of less than 2 per cent. And so rents would have gone up anyway."
In addition, some argue that abolishing negative gearing would create a shortage of rental properties because landlords would simply dump their portfolios.
Experts say negative gearing is having a greater impact on Australia's rapidly rising house prices than Chinese investment.
But that statement comes with a qualification – it is very difficult to know what the level of Chinese investment in Australia's residential real estate is because authorities do not have data that breaks things down that much.
One of Australia's most respected economists on Tuesday called for the Abbott government to rein in surging house prices in Australia's capital cities by putting an end to negative gearing for new investors.
Saul Eslake, chief economist from Bank of America Merrill Lynch, said negative gearing was contributing to the inflation of property prices to the point where Australians could find themselves in a "bubble situation."
He said the Abbott government ought to consider ending negative gearing for new investors because it would help to reduce the amounts that are being borrowed.
If that happened, new investors would either start to pay less for properties or not buy as many because the tax incentives wouldn't be there, and that would help to reduce property prices.
Negative gearing allows investors to deduct losses made on rental properties from their other income, thereby reducing their overall annual tax liability.
Mr Eslake's call comes after the Reserve Bank warned this month that macro-prudential policies may be needed to keep a lid on the country's soaring house prices.
The RBA said house price growth was being driven by investors, a large proportion of which are buying existing dwellings, rather than new dwellings, using negative gearing.
In its Financial Stability Review released last week, the Reserve Bank said strong demand by investors meant investor housing loans now accounted for about 40 per cent of all home loans.
It said it had become so concerned about Australia's overheating property markets that it was openly questioning whether bank lending practices were "conservative enough".
But the RBA's warning, and Mr Eslake's criticism of negative gearing, comes after repeated warnings from real estate agents about the level of Chinese investment in local real estate markets.
Real estate agents have been warning that foreigners have been circumventing Australian laws to buying existing properties in Australia, pushing prices up and forcing locals out of the market in the process.
AMP chief executive Craig Meller has backed macroprudential measures by the central bank to stem the sharp rise in housing prices, but said they will not address the fundamental driver of residential property prices which is the lack of supply of new housing stock.
Speaking after a breakfast in Sydney before the release by the Reserve Bank of Australia of credit data on Tuesday morning, Mr Meller said ongoing low interest rates were required to stimulated economic growth but these settings were driving investment in property which needed to be quelled.
"The challenge we've got as a country is we need low interest rate to stimulate growth in the country, and one of the side impacts of low interest rates is more and more money being invested in property, rather than stimulating broader growth in the economy," he told reporters after a breakfast speech to the Committee for Economic Development of Australia.
"Funding ways to moderate the investment in property whilst still keeping interest rates low to generate momentum elsewhere in the economy looks like good policy."
He would not be drawn on what sort of macroprudential tools might be suitable, saying this detail was a matter for the RBA and Australian Prudential Regulation Authority. After a surge in Sydney and Melbourne house prices, the RBA last week said it was working with APRA on "further steps" to reinforce safe lending by banks for housing but did not specify what steps would be taken.
Mr Meller said that the debate about macroprudnetial policy - which is focused on curbing bank lending to housing - failed to address the more important driver of housing prices which is the failure of new housing stock to keep up with growth in Australia's population.
"It always surprises me that whenever there is debate about the property market, everyone jumps to demand side controls or stimulation, rather than looking at the fundamental issue in the residential property market in Australia which is addressing the supply side. How do we actually get more homes being built?
"This is a growing country and growing nation, we increase the population by 1 to 2 per cent per year and we never get the housing market keeping it with it.
The taxationists gutted the option of making tax deductible contribs to super. So they always should have/would have(?) expected the loot to flow somewhere else that it would pick up a tax break I suppose.
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
A Rort first and foremost Class Welfare without doubt A inefficient policy: does not add to new home builds as most investors buy established homes!!!!! Directs capital away from industry and business into the pockets of banks and greedy vested interest!!!!
Anyone engaging in the use of Negative Gearing in knowledge of the above should be deeply ashamed of themselves. You are hurting Australia and future generations. No Question. You are pushing Australia towards economic disaster. No Question.
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
Should negative gearing only apply to new property?
Negative gearing is regularly in the spotlight, and Aviate Group managing director Neil Smoli says there’s one simple way to address the concerns – make it only apply to off-the-plan or newly renovated property.
Smoli notes that negative gearing tax benefits recognise the role investors play in providing rental accommodation by alleviating tax burdens.
“However, when investors use a negative gearing strategy to finance the purchase of existing dwellings, this has very little impact on new supply in a market where rental vacancies are very low,” he says.
“On one hand, investors using negative gearing to support the purchase of new off-the-plan property have a positive impact by contributing to new rental accommodation. On the other hand, investors who use negative gearing to finance the purchase of existing properties do not.”
He said that buy encouraging demand for new properties it would help stimulate construction and unlock the economic benefits of new development.
“Perhaps the fairest way to enable an investor to utilise a negative gearing strategy to contribute to new supply is to make the practice accessible from an agreed timeframe after the initial lease term commences,” he says.
“It typically takes five to six years for an investment property to become neutral, that is, for the rent received to balance the interest payable. This is influenced by the interest rate of the day, the net rental income received after costs such as management fees, letting fees, body corporate fees and outgoings are taken into account, the investor’s marginal tax rate as well as depreciation allowances.”
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