To many Australians, the connection between negative gearing and inflated property prices seems obvious. But would rents rise if it was scrapped? Reader John Byrne thinks he has a solution.
I am not affiliated with any political party, lobby group or similar. I do have a rental property. I have been trying to get some traction on the following but not being particularly influential…
First question is: what in principle is negative gearing for?
No, wrong. Negative Gearing is to provide a stock of rental properties via a government subsidy on interest payment. This is so governments do not have to own, operate and maintain properties.
Currently the negative gearing argument seems to be based upon the on or off scenarios. This to me seems pointless. Political argument for argument’s sake, without any intention to change the status quo. So I propose a third way, “Policy Targeted Negative Gearing.”
Barnaby Joyce has told us we cannot all live by the harbour in Sydney and former premier Baird made this plain by moving poor people out of the eastern suburbs and the Rocks. Therefore, we should not be subsidising this type of housing via negative gearing either. Subsidising a massive interest bill on one property is unproductive. Further, as those owning these properties can afford it there is no valid reason for providing a tax incentive. These properties simply drive the rest of the housing market up.
What to do?
- A cap on the value of the property that can be negative geared. This could be graduated (100% – 0%) or a simple cut off (e.g. Sydney north shore $1,000,000.00). The purpose is to drive investment where it is required, in affordable rental properties. You can still have $10,000,000 in negative gearing, just not all in the one beachfront property.
- The property, must be rented out permanently. If it is not rented out, no negative gearing. The purpose of this is to match supply and demand and to stop owners using negative gearing to offset their capital gains tax.
Currently in Sydney there are estimates, that up to 1 in 5 (20%)of negative geared properties are empty. The effects of this are
- A distortion in property sale prices as the market believes there are 20% less properties available.
- A distortion in rents as there appears to be 20% fewer rental properties available.
By removing, this distortion (no rent, no negative gearing tax benefit) we allow the actual market (hear that conservatives? “The Market”) decide property values and rents.
- An indexation by the ATO of the value of the properties wherever they may be (different values for different regions of course) that can be partially or wholly negative geared. This would put a real brake on the accent of property prices as desired by investors.
The net result of the above?
- Billions (possibly I have not modelled this) saved in removing negative gearing from high value properties with equally massive interest bills.
- Tax money spent, and it is spent if you consider it in economic terms as an, “opportunity cost,” is productive as it funds a much larger stock of housing.
- Removal of tax rorts.
- Genuine market driven rent prices
- Genuine market driven house prices
- An increase in construction (more affordable properties being constructed) again because not all the money goes into one property
- An effective brake on house price increases, as indexation limits the benefits that can be derived from negative gearing.
- Market reform
- High value properties no longer have access to the pool of funds offered by negative gearing and must be financed by other means
- High value properties are disconnected from the wider market, thus limiting their influence on housing prices.
Other areas to be considered would be;
- a greater than 100% negative gearing benefit for very cheap properties (rents affordable for those on welfare) and
- a long term ownership capital gains discount, this would encourage long term investment in affordable housing and discourage speculation.
I wonder why only I, a very average student of economics (only one uni unit and that was only just a pass mark), can think of this but the entire brains trust of the real economics community and politicians cannot?
B John Byrnes
NB: These are my personal views and are not endorsed by my employer or any other organisation or group.