Negative gearing encourages “speculative investment” in property and poses a “systemic risk” to the economy, an inquiry has heard.
The final report of the Financial System Inquiry said that negative gearing and capital gains tax “distort the allocation of funding and risk in the economy”.
“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment,” the report said.
“Since the Wallis Inquiry [in 1997], higher housing debt has been accompanied by lenders having a greater exposure to mortgages. Housing is a potential source of systemic risk for the financial system and the economy.”
Glen Coutinho, director of RT Edgar Real Estate Hawthorn, said removing negative gearing would not make a significant difference as it causes only minimal distortion to the housing market.
“It will take the conservatives out – there are certainly some people that won’t buy real estate, but not many,” he told Real Estate Business. “A percentage of people will look at other investments. Traditional investors – especially older investors – like bricks and mortar and prefer it to the share market.”
Piers van Hamburg, director of McGrath on Sydney's lower north shore, said negative gearing is not having the same impact on the market as it has in previous years.
“I think negative gearing becomes more imperative when you’ve got rates around 8 per cent, because there’s a lot more to negatively gear,” he told Real Estate Business. “At the moment, with rates between 4.5 and 5 per cent and returns between 4 and 4.5 per cent, there’s nothing to negatively gear.”
Prominent economist Shane Oliver recently said that negative gearing is one of three “scapegoats” being used to explain rising house prices, alongside foreign investment and SMSF buying.
“Negative gearing is more contentious, but it’s likely that curtailing access to it, when stamp duty remains very high, will have a negative impact on the supply of property, to the extent that it will have the effect of reducing the after-tax return to property investment,” he said.
“Restricting negative gearing for property would also distort the investment market, as it would still be available for other investments.”