There are a few things we need to bear in mind when discussing the effects of proposed changes to negative gearing.
According to the AFR median weekly incomes in Sydney have increased by 17 per cent in the past eight years, while house prices have nearly doubled from $546,000 to more than $1 million. In Melbourne over the past six years median incomes have increased by 10 per cent while house prices have risen by 70 per cent, from $442,000 to $749,999. Prices are high and are due for a correction.
Sydney has the second most unaffordable housing in the world with households spending 12.2 times their annual income. Melbourne comes in fourth with 9.7 times and Tweed Heads 10th.
Across Australia in 2011 on average households valued their homes at nearly six times their average household income. In 1990 that ratio was four times.
Our household debt to GDP ratio is the highest in the world. Look at how things have changed with mortgage debt:
Renters are doing it tough, there is a housing affordability crisis overall. There are problems in other countries, but the IMF says we are one of the worst, in part because prices did not suffer to the same extent during the GFC.
The young are finding it increasingly difficult to get into the ownership market, and more a staying at home longer because of the difficulty and expense of renting.
Negative gearing was supposed to make more housing available, but we are told that’s a myth.
What is negative gearing?
Negative gearing occurs when the rental received is less than the costs of ownership – That is, interest on a loan, rates and property maintenance. Under present tax law, this loss can be offset against other income, usually a salary. Someone on $200,000 will receive about half their loss back, while someone on $30,000 will only get about a fifth. Hence while ‘ordinary’ mums and dads outnumber the rich as negative gearers, most of the tax relief goes to the rich with multiple houses.
Labor has proposed that negative gearing be only available to investors in new property (about 7%) from July 2017, while existing negatively geared homes will be grandfathered. Capital gains tax concessions when an investment home is sold will be reduced from 50% to 25%.
So of the three sources of benefit from housing investment, one (tax concession) has been closed off. The second, capital gain, has been reduced and new investors will be buying into the top of a bubble. The AFR link above reckons the market in Sydney and Melbourne is due for a 2 to 5% pullback in any case.
That leaves rent.
Average gross yields (before the cost of interest on borrowed money, rates, maintenance etc) in the capital city markets average just 3.4% on houses and 4.1% on units, according to Corelogic RP Data cited in the AFR. Michael Janda cites Saul Eslake and ABC Fact Check to say that rents did not rise when negative gearing was removed in the 1980s.
That was then, this is now. It seems to me that yields are pathetic from an investment perspective. The only reason why they wouldn’t go up is that renters have no more capacity to pay.
So where will the new landlords come from in rent and capital gains are taken out of play? Labor hopes that more renters will become owners, but unless prices drop substantially, is that likely?
In truth the price of property should reduce by about a third, but this would leave investors and banks with loans unsecured by the value of the property, probably a collapse in the building industry would ensue together with all sorts of economic mayhem.
There is opportunity for a scare campaign and Turnbull has waded in by saying that property values would be smashed.
John Quiggin points out that Turnbull is effectively saying that more affordable housing is a a bad thing.
On the 7.30 Report Malcolm’s minion Senator Zed Seselja cited the Grattan Institute as saying that prices could be reduced by up to 10%. That’s way short of “smashing” and would seem to me as a desirable outcome.
Dr Jim Chalmers, Labor’s spokesman on Financial Services, says they think prices will still rise, but sustainably. Recent capital gains are not sustainable, having strayed as far as possible from their anchor, namely incomes.
The sums to be saved by Labor’s policy would be significant, around $32 billion over 10 years. Savings start slowly because of the grandfathering, but are said to increase to $6 or $7 billion pa over time.
It seems that the LNP will also change negative gearing, either by limiting the number of houses eligible or the amount that can be deducted from tax. If so they may be more politically acceptable, and possibly more fair, but unlikely to make much difference to the property market or to budget savings. Probably more in the short run if they don’t grandfather, but less in the long run.
Turnbull says they’ll use a scalpel rather than an axe. It’s a pity he can’t discuss policy in neutral, rational terms, rather than look for the political jugular. Bill’s right, he no better than Tony.
And guess what, the public are onto him, with Newspoll now 50-50 TPP.
Update: here’s a chart of Australian house prices relative to CPI 1986 – 2009 with source data from ABS, linked by BilB in comments: