Property negative gearing – Saint or Sinner?

Dr Martin Drum
Senior Lecturer in Politics and International Relations
Arts Coordinator
The School of Arts & Sciences
The University of Notre Dame Australia
I do think that negative gearing is a complex issue, and not nearly as black and white as it could be. You have in many ways grasped the basic fundamentals which are that it makes buying property very unaffordable, but does contribute to the amount of rent available. Notice that I didnt say “affordable” rent as I would argue that private rent is by no means affordable, even with negative gearing.
From the material I’ve read, the phasing out of negative gearing could only be contemplated on the back of huge investment in public/social housing, the likes of which has not occured in any Australian jurisdiction in recent years. Even then there would be a lag time before the new properties become available. The problem with this proposal is that a large drop in private investment in property (if unmitigated) would end up meaning that less houses get built, which would only make housing shortages worse. Given that rental vacancies are extremely low in WA, that would be difficult to justify.
So yes ideally this would be the path to take, but in real terms it would be tough to implement for a government. I would prefer to see affordable housing mandated through the planning approval process. This would involve insisting that all large scale developments include a minimum % of either public or social housing. In return for developers building houses for the government, the state would build infrastructure for the developer at no cost, such as local roads, sewerage, utility connections etc. If implemented carefully, the move would be cost neutral for the developer, and leave the govt doing more of what it does well, ie. roads, rather than trying to build houses, which it is inefficient at. This would also put the construction of houses on a more sustainable footing in the long term. The other advantage is that you have smaller numbers of public housing spread out in a variety of suburbs, instead of “ghetto-ising” in large estates.

Property Negative Gearing – Saint or Sinner?
In light of the recent reports in the media of the $13 billion a year cost of the Federal Governments negative gearing scheme and the need to tighten the economy’s fiscal belt, I started out the day planning on doing some research on the impact of the negative gearing system on the housing market and it’s flow on effects on the disadvantaged in our society. After all how hard can this topic be? Surely there is a clear position that we should be adopting from a social justice perspective? Certainly the recent articles from Shane Wright in The West Australian (May 1st and 6th) newspaper have criticised the system from an economic perspective, so there must be a Social Justice standpoint that we should be taking on this issue. Surely this $13 billion would be better invested in affordable housing?
How wrong was I!
I suspect that most of you will be aware of what negative gearing is and have some views on its effectiveness and consequences. For those of you who aren’t familiar with this term;
Negative gearing arises where an asset is purchased with the assistance of borrowed funds, whereby the income generated from that asset is insufficient
to cover not only the interest expense, but also the other costs involved in maintaining that asset. Therefore, an asset that is negatively geared reflects a net loss position.
While I have a reasonable concept of financial systems I don’t confess to be any sort of expert, especially relating to taxation, but after a few hours of research I am completely bamboozled. Is the negative gearing system in Australia the ‘Saint’ in terms of private investment in rental properties that keeps the rents lower than would be if property losses were not tax deductible or is it the ‘Sinner’ in overinflating the property market to the benefit of the affluent in our society at the cost of the average tax payer and those attempting to rent properties?
This debate has been occurring in Australia for many years. The attempts in 1985 to reform the system were quickly reversed. Then, like now the Government was responding to revenue concerns, bur claims of impact on property supply, construction and increased rental prices saw it reversed in 1987. Apparently these claims were made by those with vested interests in maintaining increasing property values and had little substance in reality. And this seems to be the theme of this debate, the majority of information I have read on both sides, Saint or Sinner, could be refuted by claims of vested interest in that position. In the WACOSS 2012 “Cost of Living Report”
Strong economic and population growth — together with the perverse incentives created by our tax system for investment in high end real estate, and a historic under-investment in social housing —has meant that Perth and many regional areas across WA are experiencing an extended shortage of
But surely if we followed the WACOSS recommendation to gradually wind back the “perverse” tax incentives, wouldn’t the effect be to potential make the situation worse for families struggling to buy their own homes through falling property prices and potential negative equity?
Perhaps the best position I have found is from the 2009 St Vincent de Paul submission on the “Future of Australia Tax system”
The ability to negative gear is one example of the present [tax] system failing to be neutral. Negative gearing can encourage financial losses, investment in unproductive areas and speculation, at the same time it is claimed that negative gearing has increased the supply of rental properties and decreased the rents charged by landlords. Many commentators over time have recommended the abolition of negative gearing, but the Society submits it could be put to greater effect to by linking it with the universal measure of national well-being. Negative gearing should promote future investment in areas of social need, such as social housing, aged and child care and health services.
The SVDP submission argues for the development of “a national Gross Progress Indicator (GPI) or a national well-being indicator… in order to protect vulnerable Australians and ‘joined up’ with the new taxation system to deliver a policy response to eliminating poverty and building national well-being.” This to me seems to argue a sensible position.
But what are your thoughts or views?
Updated: May 15, 2013 — 6:23 am
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