September 26th 2024.
According to economists, while phasing out negative gearing may not be the ultimate solution to Australia's housing crisis, making changes to this controversial tax write-off could still have a meaningful impact. Recently, the debate surrounding negative gearing and capital gains tax has been reignited as reports surfaced that the federal government has sought Treasury's advice on potential changes to these tax concessions. Negative gearing allows taxpayers to claim deductions when the expenses of owning an investment property outweigh the income it generates.
One of the factors that incentivize negative gearing is the capital gains tax discount, which applies to half of the profit made when a house that is held for at least 12 months is sold. The Treasury's modeling, which was revealed yesterday, has only added fuel to the fire as opponents, including the Greens and other crossbench parliamentarians, claim that these two tax policies are worsening the housing crisis. In response, Prime Minister Anthony Albanese has downplayed any plans for change, stating that the government's focus is on building more homes. However, economists believe that these policies are worth re-examining and could have a meaningful impact on housing affordability.
Professor of Economics at UNSW Business School, Richard Holden, believes that getting rid of negative gearing could "make a real dent" in the market. "My view is that it's a good thing to revisit, especially given how acute the housing affordability crisis is at the moment," he told 9News.com.au. "Part of the Australian dream is homeownership, and eliminating negative gearing would level the playing field for potential owner-occupiers at auctions. It could have a meaningful impact."
Similarly, economist Saul Eslake suggests that negative gearing should at least be phased out for investors in established housing. He argues that over 75% of property investors purchase an established dwelling, which means that they are competing with potential homebuyers for rental housing, thus increasing the demand for it. Eslake believes that abolishing negative gearing would have no impact on the net supply of rental housing or rents, while also saving over $100 billion in budget revenue loss over the next decade. "I think we need to stop doing things that needlessly inflate the demand for housing, such as negative gearing and the capital gains tax discount for investors," he said. "On the supply side, we need to remove barriers that restrict supply, such as strict planning and zoning regulations."
On the other hand, Mike Zorbas, chief executive of the Property Council, argues that the proposed changes to negative gearing would only widen the housing gap. He points to previous modeling that suggests these changes would decrease the number of new homes by 4% and only reduce house prices by 2%. "Government taxes and charges make up 30% of the cost of a new home across the country," he explains. "Instead of focusing on changes to negative gearing, we should prioritize reducing government taxes and reforming planning systems to boost supply."
But the issue of negative gearing and capital gains tax is far from straightforward and has been a politically charged topic. Crossbenchers Jacqui Lambie and Davis Pocock, along with the Greens, support scaling back these tax concessions, giving the government enough support in parliament to pass legislation. However, the Labor party has been hesitant to revisit negative gearing reforms after losing both the 2016 and 2019 elections due to their proposals to limit negative gearing to new properties only.
Leading economist and former ACCC chief, Allan Fels, also has reservations about negative gearing, stating that it encourages speculation and attracts those who are not genuine homeowners into the market. He believes that while there is no single solution to the housing crisis, a more equitable tax system is needed. "A fundamental flaw in this system is not taxing capital gains at a higher rate; the problem is not taxing inheritance," he explains. "If these changes were made, I would be less concerned about negative gearing."
In conclusion, while economists agree that changes to negative gearing could have a meaningful impact on housing affordability, the issue is a complex one with strong opinions on both sides. With the current government's reluctance to make any changes and the Labor party's hesitation to revisit the issue, it seems unlikely that any significant reforms will be made in the near future. As Fels puts it, "Politicians are unlikely to touch it as it is a widespread perk for middle-class people, including swing voters. The pushback from the many beneficiaries is too strong."
[This article has been trending online recently and has been generated with AI. Your feed is customized.]
[Generative AI is experimental.]
