What negative gearing really means

After years of being off limits, negative gearing has found itself in the crosshairs this election. The reason it’s now on the table is, ironically, the same reason it has always been off the table: it’s worth a lot of money to a lot of Australian investors. 

But with Sydney house prices now 12 times higher than the incomes of the people that live there, and home ownership on the decline, one of the major parties has decided to try and expose the elephant in the room.

Property investing and championing house price growth has been ingrained in our national psyche for so long that many people have forgotten the time when shelter was the aim of housing and one income was enough to buy a home. These days two incomes is almost a default requirement, in addition to at least one pair of fit and healthy grandparents who are willing to mind the kids for free. 

Record low interest rates have helped mask the problem in recent years. Million-dollar loans at four per cent interest are manageable for some families – just. But a loan over 25 or 30 years won’t stay at four per cent. It’s more likely to fluctuate around the historic average of the last 20 years at seven per cent, turning million-dollar homes into financial nightmares with long periods of mortgage stress or, worse still, defaults. 

Over the last two decades, property has been one of the most successful builders of wealth for those Australians who own it. We have flocked to the market like ducks to water, and why wouldn’t we? It’s served us as a reliable, logical investment. 

The problem is, as property prices climb, housing affordability suffers – a trend that will continue until the policy makers say otherwise. So is there a point that as a nation we decide that housing affordability is more important than wealth creation? We would need to decide that the main game of property is to provide shelter, with wealth creation being an important but secondary goal. 

Successful businesses in dynamic and competitive industries operate under the rule that what worked yesterday won’t necessarily work tomorrow. If we are going to design effective housing policy for the future, we need to take a leaf out of this handbook and let go of the idea that policies such as negative gearing cannot be changed because it’s worked well for many people in the past. 

There is no silver bullet to housing affordability and, whatever the proposed solutions, we need to tread carefully when making any changes. Good intentions often come with unintended consequences. But a series of properly thought-out initiatives to untangle detrimental market forces could help put us back on track to being a nation that values shelter for people. 

Wind back negative gearing and capital gains tax discounts

If the government of the day does decide to wind back negative gearing then one thing is mandatory: a careful balance must be struck between avoiding a major shock to the market (a crash is not good news, even for first home buyers) and being fair to current investors, potential future investors, and non-investors. It isn’t necessarily negative gearing itself that is the problem, but rather the extent that it is being used. A revised version with the right restrictions, such as limiting the number of properties that can be negatively geared and the number of years for which a property investment be negatively geared, is one answer. 

Rethink stamp duty and move to a broad-based land tax.

Stamp duty is a great revenue earner for states when they are going through a property boom. It also acts as a disincentive to investors ‘flipping’ properties too often. But it’s worth looking at other ways to achieve these goals. With an army of baby boomers is a surge in potential down-graders. Any barrier to downgrading the family home is going to result in big houses with rooms going to waste, making it harder for growing families to upgrade. 

Make the outer suburbs more attractive

Building more houses is often touted as the silver bullet to housing affordability, but it’s not as simple as throwing up a few kit homes. If people are going to want to live there you need transport, parks, sporting areas, shared spaces, local businesses and everything that makes a suburb a community. Governments at every level need to put money into this essential infrastructure, even if they’re not going to see an instant return because growing a community takes time.

The housing affordability debate will rage on as the election campaign draws to a close but don’t be fooled that it will end there, regardless of which party wins government. Housing affordability is not something that can be solved overnight – it will take big-picture thinking combined with a holistic approach to planning and a willingness to get Australians into their own homes first.

Peter Arnold, Data Insights Director, RateCity.com.au

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