Negative gearing has been painted as the menace depriving young Australians of the chance to buy a home, to the benefit of a wealthy few. This position is misleading and far too simplistic. It denies the reality that we as a real estate network see every day – the many mums and dads who have invested in property with the long-term ambition to build sufficient wealth to live independently in retirement and not on the public purse. And importantly, it ignores the fact that many first home buyers are able to get a foot on the property ladder by investing in a negatively geared property.
You can twist and distort figures in many ways to support any position for or against negative gearing and who it favours most. There is also further scope to make sensible changes to the policy settings that affect the investment property sector, such as APRA’s tightening of investment lending criteria in 2015.
But when you take a blunt and heavy instrument to a complex problem, you are likely to generate a whole range of unintended consequences.
Even if you accept the Grattan Institute’s highly optimistic modelling of the effect of the removal of negative gearing, there would be an average 2 per cent reduction in residential property values. That 2 per cent represents a reduction in the value of the national real estate asset of around $130 billion. That should be of concern to everyone – home occupiers, landlords, tenants and government. Of further concern, any reduction in real estate values will not be evenly distributed.
The impact is likely to be felt less in the high-demand areas of the strong housing markets of Sydney and Melbourne, where any negative pressure on housing prices would be largely absorbed due to the inherent strength of these markets. It’s in the other capitals, regional cities and towns, where affordability is not such a pressing issue, that the drop in value is likely to be greater than 2 per cent and felt most keenly. And it’s going to hurt the nurses, teachers, police officers and bank tellers who invest in regional real estate precisely because it is affordable.
Every Australian home owner, regardless of whether they own an investment property or not, will see the value of their property reduced, and if you happen to live anywhere other than Sydney or Melbourne, it is likely that the impact will be significant. The proposed changes are a blunt tool that will impact everyone.
So we are looking at a policy that won’t make any real dent in the property prices of Sydney and Melbourne but will lead to higher rents and at the same time will pull the rug out from property in other cities and regions where prices are flat at best and housing affordability is more achievable.
Here’s another hidden consequence: strip 2 per cent from the value of property and that has an impact on the stamp duty revenue that is propping up most state governments. In NSW, income from stamp duty would be reduced by around $82 million annually, with the national reduction in state government revenue exceeding $220 million. Combined with the negative impact on other taxes and council rates, it is clear that the costs of achieving a budget saving at a federal level will be borne by the states, local councils and all Australian home owners.
Grandfathering is presented as a means to protect the investments of those who have bought property in expectation of a continuance of negative gearing and capital gains tax concessions. But if you’re holding a negatively geared investment property, there is no incentive to on-sell, thereby reducing supply and putting further pressure on property prices. And again stamp duty income, reliant on a continuous turnover of property, takes a hit.
So a word of warning to the legislators who seek election by attacking easy targets: be careful what you wish for.