Call to end negative gearing

A leading economist has called on Canberra to put an end to negative gearing as the best way to dampen frothy property markets in Sydney and Melbourne.

In its Stability Review released last week, the Reserve Bank of Australia pointed out that strong demand by investors mean that investor housing loans now account for about 40 per cent of all home loans.

The RBA also said for the first time it was working with the Australian Prudential Regulation Authority (APRA) on “additional steps” to reinforce safe bank lending, particularly for lending for investors.

With investor demand surging, and steep rises in Sydney and Melbourne property prices, RBA governor Glenn Stevens last week noted it was “perfectly sound and sensible to ask ourselves whether we might at least lean on that a bit”.

But Saul Eslake, chief economist at Bank of America Merrill Lynch, says the central bank has made “a very compelling case for the government to consider ending negative gearing for new investors”.

He accepts that it is not politically feasible to abolish negative gearing entirely because around 15 per cent of voters are currently taking advantage of negative gearing – a tax regime that allows them to buy assets and deduct the interest costs against other income.

But he says that it would be easy for Canberra to decide that any new investment past a certain date would not be eligible for negative gearing.

Federal coalition MP and chair of the House of Representatives Economics Committee Kelly O’Dwyer dismissed calls for a change to negative gearing.

“We have no plans as a government to change negative gearing,” she said on the ABC’s Lateline on Monday.

Mr Eslake argues that the Reserve Bank has three options for tackling the “unbalanced” housing market “They can let the market run, which history has shown is not a good option.

Or they can lift interest rates which will cruel the rest of the economy to stop an alleged risk in the housing market.

“The third option is to introduce new macroprudential rules to limit how much the banks lend to certain types of borrower. But the risk here is that the new rules either don’t work or that they hurt the wrong people, such as first home buyers.”

In contrast, if Canberra decided to curtail negative gearing, it would reduce borrowing by investors, which would mean that investors either paid less for properties or did not buy as many.

Mr Eslake says that some supporters of negative gearing argue that it gives investors the same tax treatment as business.

‘This is a nonsense argument,” he says. “Unlike investors, businesses don’t get a 50 per cent discount on any profits they make when it comes to capital gains tax.”

Supporters also run the argument that scrapping negative gearing will lead to a steep jump in rents, as happened after former Treasurer Paul Keating decided to abolish negative gearing in 1985.

“Actually if you look at what happened, rents went up in Sydney and Perth, but they didn’t rise in any other market,” Mr Eslake said.

“And that was because in 1986-7, Sydney and Perth had vacancy rates of less than 2 per cent. And so rents would have gone up anyway.”

In addition, some argue that abolishing negative gearing would create a shortage of rental properties because landlords would simply dump their portfolios.

Australian Financial Review, Australia by Karen Maley 1st October 2014

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