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Ending negative gearing no silver bullet for affordability

By Emma Smith

Article written by Cameron Kusher, CoreLogic RP Data and distributed via realestate.com

Runaway growth in home values currently being experienced in Sydney and, to a lesser degree, Melbourne has put affordability at the centre of debate. And it’s little wonder that housing is becoming a politically sensitive topic.

The lack of a Housing Minister at the Federal level is intriguing when you look at some of the statistics relative to the housing market.

The total value of residential property at the end of May 2015 was $5.9 trillion,CoreLogic RP Data analysis shows. To put this in perspective, gross domestic product (GDP) for Australian was recorded at $1.587 trillion over the 12 months to March 2015.

The Australian Bureau of Statistics’ housing finance data shows that as at April 2015 there was $1.392 trillion in outstanding mortgage debt to Australian banks, building societies and credit unions. Meanwhile, the share market garners plenty of attention, as at April 2015 the market capitalisation of listed domestic equities was $1.693 trillion.
Based on this data it would be fair to say that housing is Australia’s largest and arguably most important asset class. Even the value of superannuation clocks in at a much lower $2 trillion, nearly three times smaller than the overall value of housing.

Questions on negative gearing

Negative gearing has become a topic of plenty of debate this month. While the current Government have ruled out changes to negative gearing, both the Labor and Green parties are highlighting potential changes to their policies.

Negative gearing allows owners of investment properties to offset their expenses (losses) against their taxable income and as a result it can reduce their taxable income. While this most certainly makes investment attractive the suggestion that negative gearing alone drives up the cost of housing is somewhat debatable.

The Federal Government made changes to capital gains tax in September 1999 and this has seemingly helped to make negative gearing much more attractive than it was previously. In September 1999 the Federal Government made changes which offered investors a 50% discount on capital gains tax when they sold their property if they held their investment for at least 12 months.

Negative gearing is essentially a way in which the Government outsources social housing to the private sector or at least this should be how it works. If we take a look at dwelling approvals data you can see that very few new approvals have been granted to the public sector over the past three decades.

Typically more than 90% of all dwelling approvals over any month are granted to the private sector with very few being approved and ultimately constructed by the public sector.

Ultimately the private sector takes on the role of construction of homes and it appears private citizens are incentivised to provide rental accommodation via the provision of negative gearing.

Is abolishing negative gearing the answer?

If negative gearing were removed no doubt housing would still be an attractive investment for some who are seeking to be positively geared however, you may find that fewer people are attracted to housing as an investment option because of the absence of the tax deductions which negative gearing provides.

The data shows that a greater number of people on lower taxable incomes claim rental losses than those on higher incomes however, as a proportion of total taxpayers a greater proportion of high income earners claim rental losses and the value of these losses is greater for higher income earners.

The longer term net rental losses chart indicates that negative gearing alone didn’t really result in a high level of net rental losses however, when the capital gains tax discount was halved that seemingly made negative gearing much more attractive and the losses began to add up.

The above article does not constitute financial advise. We strongly recommend you discuss your individual situation with your accountant or tax adviser.

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