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Negative Gearing reform has never been more important. Here’s why.

Key points

  1. Despite the scare campaigns, negative gearing reform is as needed now as it was when McKell first made the case in June, 2015.
  2. Recent downturn is driven by lack of available credit. But housing is still less affordable than it was in 2015.
  3. Property prices continue to grow faster than wages, despite the recent market contraction.
  4. Rising bank interest rates means the Commonwealth is paying $1.6 billion more today than when McKell originally made the case for reform.

Download the Levelling the Playing Field report here.

In June 2015, The McKell Institute released Switching Gears, a report which argued in favour of restricting negative gearing to new properties only.

Since then, the core components of that policy have been adopted by the Federal Opposition, which has pledged to implement the reform should it form government after the next federal election, due in the first half of 2019.

Since Switching Gears was released, opponents of the policy have cited changing dynamics in the Australian housing market as justification for not proceeding with the proposal.

Our latest report Levelling the Playing Field – authored by Professor Richard Holden, the architect of the reform – argues the key justifications for reforming negative gearing are actually stronger than when The McKell Institute’s original report was released.

There are a few key reasons.

 

Housing is still unaffordable

When Switching Gears was published in 2015, the median house price in Sydney was $880,000. At the end of 2018, despite a sharp drop in prices from the housing boom’s extraordinary peak, the median house price in Sydney is still $945,000.

A better measure of housing affordability is the price to income ratio, which also shows that housing affordability is considerably worse than when McKell released Switching Gears in 2015. The notable exceptions are Darwin and Perth, which have both seen significant market corrections in recent years:

Additionally, property prices have simply been rising much faster than wages. Australia has barely seen any real wage growth in recent years, with wages (represented by the Wage Price Index) and inflation (represented by the Consumer Price Index) growing at similar rates. It’s clear that, even in recent years, property (represented by the Property Price Index) is growing much faster – putting housing further out of reach for more Australians.

 

Negative gearing is costing more

From a revenue perspective, there is arguably a greater case for reforming negative gearing to improve the Commonwealth budget bottom line now than there was in 2015.

Since then, banks have raised interest rates – particularly on interest-only loans. This has impacted the Commonwealth’s tax expenditure relating to negative gearing by $1.6 billion. Considering the record government debt facing the Commonwealth, there’s never been a better time to pursue sensible, budget-friendly reform.

 

Reform would boost construction

By allowing negative gearing to continue for new construction, the reform plan is likely to boost housing stock. This is needed to keep pace with growing demand. The shift to negative gearing for new construction only may also provide incentives for state and local governments to adopt policies that increase prospects for new construction. A boost to construction would also have a positive economic effect.

Most investment is directed towards established dwellings. While established property will always be changing hands, it’s clear that a boost to housing supply is needed to keep pace with Australia’s growing population. Leveraging the powerful incentives of current negative gearing tax concessions towards new property will help achieve that.

 

First home buyers are still struggling

For a decade, the number of first home buyers entering the market has remained more or less static. Alongside the rising cost of properties themselves, first home buyers are often outbid at auction by property investors. There is, simply, an uneven playing field, with investors naturally advantaged by negative gearing policies as they stand.

 

Property investment will still be lucrative after reform

The McKell plan realises the powerful incentives associated with existing negative gearing policy. That’s why it seeks to leverage them toward a greater good – the construction of new housing stock – rather than just towards endless speculative investment on existing property.

Property investment is a long-term game. Australian housing markets are cyclical, demonstrating at times sharp monthly rises and falls. But across the country over the last decade, all markets have seen median prices rise considerably. There is no evidence that reforming negative gearing would change this underlying dynamic over the long term: just ask the 50 economists we surveyed in 2016. 

It is right that a robust debate occurs regarding changes to negative gearing.

But, as Professor Richard Holden notes in The Australian, the “underlying economic logic on negative gearing is at least as strong or stronger than it was three years ago”.

It’s time to reform negative gearing to make Australia’s housing market fairer, level the playing field between first home buyers and investors, boost new housing supply, and put the Commonwealth budget on a more sustainable footing.