Tax breaks should encourage investors to build new houses, not buy existing ones
Tax breaks should encourage investors to build new houses, not buy existing ones; Australia has a severe shortage of housing, with half a million more homes needed for people on low incomes
Tweet Topic Started: 4 Oct 2013, 04:24 PM (460 Views)
As the housing market heats up, the elephant in the room remains tax reform, including tax breaks for geared property investments.
Australia has a severe shortage of housing, with half a million more homes needed for people on low incomes. We are also relying on housing construction to pick up the economic slack from the phasing-down of the mining boom. Yet even at this early stage in the housing recovery, there are concerns the market is overheating. House prices in Sydney have risen by 9 per cent since the start of the year.
It's too early to say whether this is another house price bubble in the making but if it is, it would extinguish the hopes of low- and middle-income home buyers and tenants.
We've been here before. Between 1996 and 2004, house prices rose by about 80 per cent in real terms. This was largely driven by a surge of borrowing to invest in rental housing. The proportion of taxpayers with an investment property doubled over the decade to 2004, reaching 17 per cent in that year. House prices rose because of land shortages, easier access to bank credit and generous tax rules for property investors.
Property spruikers convinced many people the best path to a comfortable retirement was to take advantage of easy credit, offset the expenses against their wages, and ride the property boom in search of concessionally taxed capital gains.
Easy credit, rising house prices and tax breaks are a heady mix. It's time to look seriously at tax policy, which is a large part of the problem.
It was no accident that the last residential investment boom followed a government decision in 1999 to halve capital gains tax rates for individual investors while leaving negative gearing rules intact.
The vast majority of negatively geared housing investment is in existing properties. Prospective owner-occupiers were displaced from the market and tenants were eventually squeezed by higher rents when supply failed to keep up with demand.
Expensive housing is by far the main cause of cost-of-living pressures in Australia. More than a million people on low incomes are experiencing housing stress, spending more than 30 per cent of their income on housing costs, with the majority in private rental. The solution to our housing affordability crisis is to divert investment into new, lower priced homes and remove bottlenecks from the supply of such housing, especially in our cities.
Instead of encouraging individual investors to borrow to the hilt to buy existing houses, the tax system should encourage them (and, better still, institutional investors) to build new ones.
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