Any move to abolish negative gearing as a means of salvaging the upcoming Federal Budget would be disastrous for the property market, according to a prominent senior economist.
“The [government] announced a deficit of $12 billion, which means our economy is not generating the income it was expected to generate due to a number of reasons,” Australian Property Monitors (APM) senior economist, Dr Andrew Wilson, said.
“That means cost cutting and revenue increases are going to have to be found to try to balance that deficit.
“Proposals are being put forward now to find that extra revenue, including the proposal to increase the Medicare levy from 1.5 per cent to 2 per cent and the proposal to perhaps abolish negative gearing for property. This is something that does come along every now and again and it is more of an ideological proposition amongst the economic commentators.”
According to Dr Wilson, the idea to eliminate negative gearing was tried in the 80s with little success.
“It is a high level theory, but in practice it would be disastrous,” he said. “It was tried once before, 30 years ago, and it did prove to be a disaster at that time. I believe that it would be a mistake," said Dr Wilson.
“The Australian housing market, as it has proved over the last 12 months particularly, is a robust and resilient market that is finely tuned and negative gearing is an essential element to keeping that housing market ticking over.”
Mr Wilson admits whilst abolishing negative gearing could save the taxation office $5 billion, the transition period would be a disaster for the property market.
“That $5 billion at best would turn into public housing and provide 5,000 to 10,000 homes a year to the already competitive rental market, which is nowhere near enough to provide to the needs of the private market," he said.
“At the moment in Sydney, over 50 per cent of the market is made up of investors and a number of investors are being funded by self-managed super funds. Investors are keeping the market active, they provide most of the private rental stock and if we ever abolished [negative gearing], heaven help the housing market.”