Chapter 4 - Factors influencing the demand for housing

Chapter 4 - Factors influencing the demand for housing

4.1        There are a number of factors which have driven up the demand for housing, and in particular for home ownership, in recent years.

Higher incomes

4.2        As Australia has lifted its productivity, and benefited from the higher prices for its commodity exports due to the 'resources boom', average incomes and household wealth have increased.[1] It is unsurprising that households have wanted to spend some of this increased income and wealth on improving the quality of their housing. At the upper end there has also been increased demand for second 'holiday' homes, particularly in coastal regions.[2] To the extent that supply responses are limited (see next chapter), this increased demand leads to higher prices.[3]

4.3        For many couples, household incomes are higher because both partners now work (as indicated by rising labour force participation rates). However, as Professor Julian Disney notes:

By fuelling competitive bidding-up of house prices it has led many couples into taking on excessive workloads to pay their mortgage.[4]

4.4        Incomes have increased at a similar pace across most income quintiles in the past decade.[5] But there are likely to be some groups whose capacity to save and bid for homes has improved less than others. For example, around 300 000 people have accumulated HECS/HELP debt, which may be an impediment to buying a home.[6]

Demographics

4.5        The average household size has decreased for a number of reasons, such as later marriage, fewer children and increased incidence of separation and divorce.[7] This increases the demand for housing for a given population. Demographic projections are for this to continue, with lone person households expected to increase at a much faster rate than family and group households.[8]

4.6        Australia has relatively strong population growth for an advanced economy. A large component of this reflects relatively high immigration compared to comparable countries. Higher immigration rates have added to demand for housing, especially as immigrants tend to be disproportionately young adults.[9] Immigrants have also tended to head for areas where housing is already short, such as Sydney, rather than to country regions. This partly reflects a perception of where the best job opportunities are located. It has a self-reinforcing aspect as new arrivals prefer to locate in areas where friends or relatives have already gone or where there are shops and cultural facilities catering to people from their ethnic background.

4.7        An eminent demographer points out that:

About half the growth in households in Melbourne is attributable to overseas migration. When you push out the 30-year projection, as you get near the end of it, about 80 per cent of the growth is attributable to migration...in Sydney, all the growth in households is attributable to overseas migration.[10]

4.8        This has led some witnesses to suggest restricting immigration, even of skilled workers, as a means of curbing rises in house prices:

One of the key drivers of the housing crisis, we believe, is the continued rapid population growth in Australia, which is a continent of very low carrying capacity, and most of the development is around the edges of the continent...[we recommend] that we train our own skilled workers and that we cease poaching skilled workers from other countries.[11]

4.9        In this context, the committee also notes concerns that in the current environment of skill shortages in the construction industry, the net impact of immigration is inflationary:

We do not have the trades to build the housing stock that we need. Immigration into the country is fuelling demand at a much faster rate than immigration is helping our industry build that extra demand.[12]

4.10        There are also alternative arguments:

I am all for increasing immigration....I think that, to support infrastructure in this country with the landmass we have, we need a lot more people to use those facilities.[13]

4.11        The Government has made it clear it sees substantial net economic benefits from continued high rates of immigration:

The Australian labour market is the tightest it has been in a generation, with skill and labour shortages pushing up labour costs and contributing to inflationary pressures. Immigration will continue to be an important contributor to labour supply, with skilled migration in particular helping to address Australia's skill needs in the short-term while also delivering fiscal benefits.[14]

4.12        The committee regards population growth policy as an important issue, but one outside the terms of reference of this inquiry.

4.13         The relationship between the overall number of skilled migrant workers and the number with particular skills in the construction industry is discussed in more detail in chapter 5 (paragraphs 5.60–5.64).

High rents

4.14        The increase in rents in recent years has increased the desire of many renters to buy a home instead of renting. However, having to pay higher rents has reduced the ability of these households to save a deposit. The net impact on the effective demand for house purchases is therefore ambiguous.

Lower interest rates

4.15        The decline in the standard home loan interest rates from the mid–1990s to early 2002 increased the amount that households could borrow and so gave them the ability to bid up house prices. For example, the repayments on a 30–year mortgage of $100 000 at an interest rate of 14 per cent are $1185 per month. When interest rates are instead 7 per cent, the same repayments can service a loan of $178 000.

4.16        The main reason for the drop in housing loan interest rates had been the lowering of the Reserve Bank's policy interest rate as a low inflation environment has become established. But increased competition has also seen a reduction in the margin between the policy interest rate and the housing loan rate.

4.17        If this mechanism were the only driver of prices, then prices would have fallen back again as interest rates have since risen. However, there may be inertia in the system, or prices may be 'sticky', as vendors are reluctant to accept low bids. This would imply that affordability will only be restored by the gradual rise in incomes rather than a fall in nominal house prices.

4.18        Given that underlying inflation has recently risen above the Reserve Bank's 2‑3 per cent medium-term target band, it could be argued that aggregate demand in the economy has been allowed to grow faster than aggregate supply. A loose fiscal and/or monetary policy is likely to result in rises in asset prices, including house prices, as well as generalised inflationary pressures.

4.19        When the Reserve Bank Governor was asked what the central bank could do about housing affordability he replied:

the best thing that we can do is keep inflation rates controlled, because if we do not do that then interest rates will end up much higher than otherwise. I think the biggest problem for housing affordability is that basically, particularly if you are a first home buyer, the level of house prices is too high. The policies to address that are mainly not in our preserve, except that, if we run monetary policy too loose, house prices tend to inflate more than they need to and that would not be good.[15]

4.20        The committee received comment from one submitter who criticised the Reserve Bank's approach to monetary policy. Mr Phil Williams highlighted in his submission that the RBA's inflation target is set solely in terms of consumer prices, not asset prices. The cost of land is not included in the CPI. As a result, Mr Williams argued that the RBA's monetary policy failed to respond to the sharp spike in house prices in 2002–2003.[16] He claimed that the underlying cause of house price inflation is the conduct of monetary policy which should aim for house price stability, not just the 2–3 per cent CPI band.[17]

4.21        The committee does note that the RBA has been vigilant in seeking to restrain the CPI to within its target band. There have been several increases in the official cash rate over the past three years which 'is helping to produce a moderation in demand'.[18]

Table 4.1: Housing finance markets

 

Typical term of mortgage (years)

Typical loan-to-value ratio for new mortgages (%)

Variable rate mortgages  (% of total)

Owner-occupiers with mortgage (% of total)

Home equity with-drawals

Mortgage market index#

Use of mortgage-backed securities

Australia

25

80

85

45

yes

0.69

extensive

Austria

25

60

 

 

no

0.31

 

Belgium

20

83

25

56

no

0.34

limited

Canada

25

75

30

54

yes

0.57

extensive

Denmark

30

80

32

 

yes

0.82

no

France

15

75

20

38

no

0.23

limited

Germany

25

70

30

 

no

0.28

yes

Hong Kong

20

70*

most

 

 

 

yes

Ireland

20

70

most

 

limited

0.39

limited

Japan

25

80

21

 

no

0.39

limited

Netherlands

30

90

26

85

yes

0.71

extensive

NZ

25-30

95

16

 

 

 

limited

Norway

17

70

most

 

yes

0.59

no

Singapore

30-35*

80*

most

 

 

 

yes

S. Korea

20*

56

most

 

yes

 

limited

Sweden

25

80

98

 

yes

0.66

limited

Switzerland

15-20

80*

35

 

no

 

limited

UK

25

75

97

60

yes

0.58

yes

USA

30

80

22

65

yes

0.98

extensive

*maximum  # IMF (2008) measure: higher values indicates easier household access to mortgage credit. Sources: BIS (2006, pp 12–4); Ellis (2006, p. 14); IMF (2008); Lawson and Milligan (2007, p.46); Tsatsoranis and Zhu (2004, p. 69); Zhu (2006, p. 60).

Greater credit availability

4.22        In addition to interest rates being lower, loans have become easier to obtain. In the longer term this has been a welcome result of financial deregulation. Non-bank lenders have increased the availability of credit for housing, tapping into securitisation markets. Since deregulation, the Australian housing finance market has developed a wide range of products and credit is available to all potential borrowers who can afford the repayments (Table 4.1).

4.23        In this brave new financial world, banks no longer 'ration' credit only to customers with a long record of placing money in low-interest deposit accounts with them. As the Reserve Bank's deputy governor noted:

...if you go back just 30 years it was very hard for households to get access to finance. Basically, to get a housing loan you had to save for years at the bank and then you had to plead with the bank to give you some money and then they only gave you some of the money. You had to go to a finance company, a building society or someone else and borrow at much higher rates to get the rest of the money to buy a house...and if you were a woman you had no chance.[19]

4.24        Looking back further, the increase in the availability of credit is even starker.

Chart 4.1

Chart 4.1 - Household Credit - Australia

Source: Battellino (2007).

4.25        However, there is evidence that recently credit standards have been loosened excessively. This was been most noticeable in the United States where the prevalence of 'sub-prime' loans is now causing serious problems in financial markets. While Australian lenders have not gone as far as their counterparts in the US, the Reserve Bank has referred to 'the general lowering of credit standards that has occurred since the mid 1990s' and the Australian Prudential Regulation Authority has referred to lenders having 'been willing to move out the risk spectrum by loosening their credit standards'.[20]

4.26        Housing lenders are now much more likely to allow customers to borrow amounts that require more than 30 per cent of income to service and will lend a higher proportion of the value of a property.[21] There is considerable variation among lenders in how much they will lend, as noted by the Australian Prudential Regulation Authority: 'The most aggressive ADI will typically be willing to lend more than twice as much as the most conservative'.[22]

4.27        There are disadvantages in moving away from the old model where banks required people to save a deposit with them before granting a loan. As Dr Judith Yates commented: 'having a savings history is not a bad idea in that it indicates that people do have the capacity to save'.[23] Households unable to save regularly may struggle to meet loan repayments.

4.28        The greater availability of credit has fuelled the aspirations of first home buyers. A Queensland developer gave this example:

When we first started developing land out there [Ipswich], in 1992, we noticed that people would buy a block of land and spend probably the next 12 months building their house. They would spend every weekend out in the front yard landscaping, doing all those things that they could not afford to do when they first built the house. It probably took them almost two years to come up with a house in the form that they actually wanted. Now we do not see any of that. Now we see people shifting into a house with everything done up-front—swimming pool, landscaping, everything. My point is: I think people want everything straightaway these days.[24]

4.29        As lenders moved from rationing credit to marketing it, some households were offered larger amounts of credit than they could readily repay:

Deregulation of the financial institutions in the eighties had a significant impact on low-income people. Not only do those people sign up for things they cannot afford but also they often do not understand the paperwork they are signing.[25]

4.30        A similar view was put by John Symond of Aussie Home Loans:

money has been too free. Instead of looking at getting their ultimate home step-by-step, young people expect and want a new home with all the mod cons. They go off to a department store and borrow $20,000 for a plasma TV, new lounges and everything else in the belief that it is interest-free and the latest and the greatest. They then find out that they have been stung with a 28 per cent interest rate. So clearly credit tightening would be a good thing.[26]

4.31        Regretting some of the excesses associated with financial deregulation might be regarded as wishing the stable door had been shut before the horse had bolted. But the committee did hear some suggestions for some mild forms of regulation to address these concerns:

Options for consideration may include mandatory minimum credit checks, minimum loan-to-value ratios for property purchases, restrictions on advertising targeting persons with a poor credit history, or public disclosure of the level of credit risk held or on-sold by lending institutions.[27]

Speculative demand

4.32        In addition to the demand from people wanting a house in which to live, there is a speculative element to the demand for housing. As one witness put it, 'houses are being valued as speculative assets, not as homes for Australians anymore'.[28] (See the discussion in Chapter 2 on 'changing aspirations').

4.33        As well as encouraging home ownership, this attitude has led many households to borrow to purchase a second investment property.[29] Investors now account for about a third of new home loans. The Reserve Bank (2003, p. 48) has referred to the role of unregulated property investment seminars in promoting the purchase of investment properties.

4.34        Except for the brief period of 'irrational exuberance' about hi‑tech stocks around 2000, Australians have generally regarded property as a better investment destination than equities, although they are less attracted to it now than in the 1980s.

4.35        There is a self-reinforcing aspect to speculative booms:

Related to this boom period is the self-generating nature of house price rises. Most finance for housing arises from the high price already of existing housing, because people upgrading build on the increased value of their housing, and investors are then drawn in by rising prices. So you have a self-generating effect until they hit something like much higher interest rates or a recession or something.[30]

Chart 4.2

Chart 4.2 - Wisest Place for Savings

Source: Reserve Bank (2003, p. 41)

Taxation influences

4.36        This speculative demand for housing may be encouraged by some aspects of the taxation system, which makes investing in housing (and sometimes other assets yielding capital gains) more attractive than alternative investments. A blunt assessment is provided by Professor Julian Disney:

...a major cause of our problems is that we have excessive exemptions for owner-occupiers from capital gains tax, land tax and the pension assets test. They are so generous that they have driven up housing prices. They have ended up being not in favour of homeownership; they are in favour of current homeowners but they are not in favour of homeownership.[31]

4.37        In similar vein, the economics journalist Ross Gittins has commented:

Do you see what the special tax-free status of housing does? By pushing up the price of homes it makes it that much harder to attain the state of being a home owner, but makes the benefits of home ownership even greater if you manage to make it. The jackpot's bigger, but harder to win. And a system that is biased in favour of owner-occupiers is a system that is biased against renters. That's unfair to people who spend all their lives as renters, as well as making it harder for would-be home owners to make the leap.[32]

4.38        Significant tax concessions are currently provided for housing. It is not easy to find hard data on the costs of most of these concessions[33], but the secretariat has put together in Table 4.2 some approximate numbers from the sources indicated, based on the assumptions listed. In addition to the tax expenditures listed, the exemption of owner-occupied housing from the asset test for the age pension costs around $10 billion.[34]

4.39        The combined total of capital gains tax arrangements, land tax exemption and negative gearing arrangements is estimated to be in the order of $50 billion per year. That reflects against the $1½ billion in the Commonwealth–State Housing Agreement and the $1 billion spread over four to five years proposed for the new National Rental Affordability Scheme and the Housing Affordability Fund. These tax concessions also mean that the overall support to wealthy homeowners is greater than that to low income renters.[35]

Table 4.2: Taxation expenditures pertaining to housing ($ billion in 2007-08)

Capital gains tax exemption for owner-occupied housing[36]

20

Discount on capital gains on investor housing[37]

6

Land tax exemption for owner-occupied housing[38]

10

Negative gearing for rental housing[39]

2

Non-taxation of imputed rent for owner-occupied housing[40]

15

Sources: Secretariat estimates, see footnotes.

Table 4.3: International comparison of taxation regimes

 

Interest tax deductibility

Capital gains tax

Land tax

Investor

Tax on imputed

Indirect tax rate

 

Owner

Investor

Owner

Investor

Owner

Investor

Negative gearing

Depreciation

rent

on new houses (%)

Australia

no

yes

no

half rate

no

yes

yes

yes*

no

10

Canada

no

yes

no

half rate

yes

yes

yes*

yes

 

 

France

no

yes

no

no*

limited

limited

limited

yes

no

20

Germany

no

no

no*

no*

limited

limited

yes

yes

no

16

Neth'nds

yes

na

na

na

yes

yes

na

no

yes*

19

NZ

no

yes

no

no

limited

limited

yes

yes

no

0

Sweden

yes

yes

limited

limited

yes

yes

yes

no

 

 

Switz.

yes

yes

yes

yes

yes

yes

no

yes*

yes

 

UK

no

no

limited

yes

limited

yes

yes

no

no

0

USA

yes

yes

no

yes

yes

yes

limited

yes

no

 

Sources: Ellis (2006, p. 11); Lawson and Milligan (2007, p.46).   *under some conditions

4.40        The tax treatment of housing in Australia is compared with that in comparable countries in the above table.

Recommendation 4.1

4.41       In the interests of more informed discussion of arrangements to encourage affordable housing, the Treasury be asked to publish current estimates of various taxation and related measures affecting the housing market.

Discount on capital gains on investor housing

4.42        Capital gains on investor housing held for over a year are taxed at half the marginal tax rate applied to other income.[41] A common argument for this discount is that it also applies to holdings of shares.[42] Some would contend that the logic of not discriminating between different types of income would mean that all capital gains should be taxed at the same rate as other income. (In some tax regimes, capital gains are regarded as 'unearned income' and taxed at a higher rate than other income.) The current arrangements do not apply to alternative investments, such as bank deposits (and education and training), which generate income that is not in the form of capital gains.

4.43        A number of witnesses argued that capital gains should be taxed like other income. Apart from fairness concerns, it was argued that the concession encourages investors to focus on investment in that type of housing where capital gains are expected to be largest and this may be more expensive rather than affordable housing:

...we should not have the discount on capital gains tax, because it is crucial that we do not encourage investment to go where the capital gain is the greatest. We need it to go to the bottom end.[43]

4.44        Another suggestion was that the concession be more focused:

Australians would be better served if the incentives were based entirely on newly constructed houses rather than established houses so it led to an increase in supply.[44]

4.45        In contrast, the construction industry argues that the tax rate on capital gains should be lowered further:

...governments need to introduce a stepped-rate capital gains tax where after, say, 10 years there is no capital gains tax applicable. This will mean you will get investment into the rental market.[45]

Capital gains tax exemption for owner-occupied housing

4.46        Capital gains on owner-occupied housing (the 'family home') are exempt from income tax. This is another aspect of the taxation system which favours housing as an asset class and increases demand for it.

4.47        Master Builders Australia argue that the exemption should be retained, on the grounds that:

There is no empirical evidence to support the proposition that the tax exempt status of home ownership undermines the equity or efficiency of the tax system.[46]

4.48        Others witnesses expressed reservations. Professor Sorensen commented:

...the tax breaks afforded to housing—for example, the absence of capital gains tax for owner-occupied housing...just simply tend to feed in to higher prices for housing.[47]

4.49        The exemption may also lead to households demanding larger homes than they require at the time for accommodation, to increase their prospective capital gains:

Owner-occupiers were encouraged to over-invest in housing producing the so-called 'McMansions' in the outer suburbs. This was, in part, a logical response to the fact that capital gains are not paid on the family home. The family home was thus seen by middle income households as an opportunity to maximise their savings.[48]

4.50        Another fault with this tax concession is its regressive nature:

...the capital gains tax exemption for owner-occupied housing is vastly regressive in a social sense, with nearly all the gain from that exemption going to high-income households.[49]

Land tax exemption for owner-occupied housing

4.51        All states, and the ACT, impose land taxes but exempt almost all owner‑occupied housing (Table 7.6). This impacts on what in principle would be an efficient and equitable tax and can encourage some people to hold wealth in the form of housing in excess of their requirements for accommodation.[50]

4.52        Shelter WA recommends capping this exemption to a level 10 per cent above the median house price for the region.[51]

4.53        A problem in taxing the land value of owner-occupied housing is that asset‑rich but income-poor households, such as retirees, may need to incur debt to pay it. This is easier to do now that 'reverse mortgages' are more readily available, but older households are likely to be wary of increasing their debt. Professor Disney suggests addressing this problem by making the land tax at least partially deferrable until sale.[52]

Negative gearing

4.54        'Negative gearing' refers to allowing investors to deduct losses on rental property from their other income (not just other property income) and so lower their tax liabilities. In aggregate, landlords received gross rental income of $19 billion in 2005–06, from which they were allowed to deduct $14 billion in interest, $1 billion in capital works deductions and $9 billion of other deductions (including letting agents' fees, body corporate levies and council rates), giving an overall 'loss' of $5 billion which they could offset against other income.[53]

4.55        Included among the deductions is a depreciation allowance of 2½ per cent on new buildings. This had been introduced at 4 per cent in 1985 when the scope of negative gearing was reduced by quarantining the interest cost offset to rental income.[54] The rate was lowered to 2½ per cent in 1987 when the quarantining was removed and full negative gearing restored. It could be argued that houses are an appreciating rather than depreciating asset, or that 2½ per cent overstates any physical depreciation (ie that the average house will last more than forty years).

4.56        Negative gearing is criticised on equity grounds:

We have argued that it is iniquitous. It is not spread fairly and it really represents one of the starkest contrasts in the Australian taxation system.[55]

4.57        This leads to suggestions to cap it.

...there should be caps. There should not be unlimited access. Millionaires and billionaires should not be able to access it, and you should not be able to access it on your 20th investment property. There should be limits to it.[56]

4.58        Master Builders Australia defend negative gearing as 'part of a modern tax system'.[57] Table 4.3 shows that tax systems in a number of modern economies do not allow, or restrict, negative gearing.

4.59        The Real Estate Institute of Tasmania claimed that 60 per cent of those using negative gearing 'are your mum and dad investors—normal Australians—not the rich and wealthy'.[58] While investors owning rental properties may be 'normal', they may also be more affluent than the average taxpayer.

4.60        A number of witnesses point out, correctly, that negative gearing also applies to other investments such as purchases of shares.[59] However negative gearing seems to be used a lot more for housing than for investment in other assets, with some recent estimates suggesting that a third of investors in housing claim they are making losses. In many cases, when the rental property is initially bought, the investor expects to make such a loss but hopes that (concessionally taxed) capital gains will mean the undertaking becomes profitable. As noted above, in Australia housing investors routinely make an aggregate loss, while in other countries they generally make an aggregate profit.[60]

4.61        The most common argument by supporters of negative gearing (and capital gains tax concessions) is that it increases the supply of rental accommodation and keeps rents lower than they otherwise might be.[61] FaHCSIA stated that 'the taxation provision for negative gearing has demonstrably increased the amount of rental housing that is available in the broader market', but under later questioning, acknowledged that 'we do not have any information from our own sources' to support this and made references to work by the Australian Housing and Urban Research Institute.[62]

4.62        It does seem to be the case that rental yields (ie rent as a proportion of the property price) on their own could be unattractive without the tax advantages. A common rule of thumb in the Australian real estate market is that a property that costs X thousand dollars will rent for about X dollars per week. This implies a gross yield of about 5 per cent. After deducting expenses such as maintenance, letting agents' fees and so on, net yields are lower, currently around 3 per cent. This is well below interest rates being paid by banks.

4.63        But a further reason advanced as to why these yields are low is that the tax advantages given to housing have led to house prices being bid up. On this argument, without these tax breaks, house prices would be lower, making rental yields attractive to investors without the tax breaks being required.

4.64        As noted above, negative gearing was restricted in July 1985 and restored in October 1987. Rents rose around the time it was restricted and its restoration was followed by an increase in the supply of rental housing. However, some argue this may have had more to do with the global stockmarket boom and crash occurring at the same times, initially attracting and then scaring investors away from shares – the main alternative investment asset to rental housing.[63]

4.65        Negative gearing is also seen as advantaging investors over owner-occupiers. One witness claimed it 'amounts in essence to much cheaper finance for investors versus home buyers'.[64]

4.66        Even if negative gearing encourages investment in rental property, many witnesses agreed 'the funds that go into negative gearing housing for rental do not go to modest or low-income rental'.[65] Two examples of this argument are:

...there is a major need...for some changes in our taxation system that are going to support investment in long-term, low-cost rental accommodation. ...We have seen negative gearing have a positive impact on the willingness of people to invest in rental property as part of their investment profile and strategy. But that is very selective and it is not long term. If we are to deal with the rental accommodation side of housing affordability, we are going to need to see superannuation funds, infrastructure funds and the like being prepared to take a long-term view of developing and holding that accommodation, to provide low-cost rental alternatives for our society.[66]

At the moment the only good that comes out of the use of negative gearing is the creation of rental property but, unfortunately, very little of it is at an affordable level.[67]

4.67        To the extent that negative gearing changes the tenure arrangements of some housing, it is not regarded as particularly beneficial by some:

...with a given block of housing, if an investor simply turns a house over from owner-occupation to investment, that on the face of it means there is more housing for renting, but they are obviously displacing one household net from owner-occupation to renting. On the face of it, investment in housing simply does not assist the renting situation.[68]

4.68        There are differing views about whether negative gearing leads to construction of new housing or a bidding up of the prices of existing homes. The Real Estate Institute of Australia argues:

Negative gearing as it is certainly encourages the building of new property. Given that a major component in the tax offset—or write-down, if you like—of negative gearing comes from the depreciation component, that component is obviously a lot higher and a lot more attractive for new properties. So a lot of money from investors using negative gearing as it stands actually goes into new property.[69]

4.69        Professor Sorensen by contrast believes:

...the tax breaks afforded to housing—for example...negative gearing for rental property...just simply tend to feed in to higher prices for housing...We would have lower rentals combined with better returns for owners of rental accommodation, were negative gearing to be abolished.[70]

4.70        This has led to some suggestions to modify it in ways that would encourage construction of new and affordable housing. Mr Pollard suggests:

negative gearing be applied only in the case where investors buy new houses and that it not apply to the buying of established houses. The effects of this would be that investor interest in established houses would fall significantly and so we could expect that prices in future would rise much less than prices of housing generally otherwise, because the vast majority of investor finance is used on established houses.[71]

4.71        National Shelter suggests:

to taper it to ensure that you can only maximise the level of investment on it if you are building affordable housing.[72]

4.72        Along similar lines, Professor Burke suggests restructuring it:

...in a way which encourages greater investment in new supply and lesser investment in existing stock, which only puts investors in competition with first home buyers. ...Instead of having 100 per cent allowable for all expenses, you have a higher deductibility—we recommend up to 125 per cent—for investment in new construction and the purchase of the new rental property. It reduces to only 75 per cent deductibility for investment in an established property. That 125 per cent deduction only applies for a benchmark affordability property—in other words one that is probably around $300,000, which could be indexed annually. But then the 125 per cent reduces as prices go up. So over some cut-off point like $500,000 or $600,000 you are back to the 75 per cent.[73]

4.73        Only a few submissions wanted to abolish negative gearing totally.[74] But there were other suggestions to restrict or quarantine it:

The loss would be available in future years as the rent income exceeded the expenses, but in the early years it can't be used to reduce overall taxable income. This would have an effect without being a massive change.[75]

4.74        The attractiveness of negative gearing would be greatly diminished if the tax discount on capital gains on investor rental housing was removed.

Recommendation 4.2

The committee recommends that Australia's Future Tax System Review Panel consider the implications for housing affordability, as well as the overall fairness of the tax system, of the:

  1. tax discount for capital gains on investor housing;
  2. exemption from land taxation of owner-occupied housing; and
  3. current negative gearing provisions.

Navigation: Previous Page | Contents | Next Page

Top