It’s time to abolish negative gearing

Clearly, the tax system is biased towards the rich in terms of cost deduction and tax liability minimisation. Some of this bias can be reduced by maintaining consistency: labour should be allowed to deduct costs against wages but disallow negative gearing for investors.

Increasing the rental stock and lowering rents

This is the primary argument in favour of negative gearing: that it provides an incentive to investors to purchase property for rent, thus increasing the supply of rental properties as a proportion of the total housing stock. As the reasoning goes, negative gearing holds rental prices down, benefiting tenants.

The evidence shows otherwise. 92% of residential property investment is for the purchase of existing dwellings rather than those newly constructed, meaning that former owner-occupiers and tenants have to purchase or rent elsewhere, respectively, thus resulting in little to no net increase in the supply of rental dwellings.

In the long term, it makes little sense for the supply of rental properties to increase compared to the total residential stock unless there is a profound upward swing in housing prices, with investors spurred into the market on expectations of making a substantial profit through realising capital gains upon sale. Accordingly, there is little incentive when long term data from Australia and other countries shows that housing prices track inflation, despite numerous and ongoing booms and busts.

Negative gearing is also badly targeted as high-income professionals and millionaires also allegedly receive lower rents. If policymakers are concerned about rental affordability, there are other options to pursue. The obvious candidate is the Centrelink Commonwealth Rent Assistance (CRA) scheme, a subsidy provided to low-income tenants.

The effects of quarantining negative gearing in the 1980s

The favourite scare story promulgated by the housing lobby is that when the Hawke/Keating government quarantined negative gearing during 1985-87, it caused rental prices to surge, quickly leading to its reinstatement. Fortunately, not only did the evidence refute this urban myth, it showed that negative gearing can be safely quarantined, if not abolished.

Rents rose in Perth and Sydney only, remained steady in Melbourne and Canberra, and fell in Brisbane, Adelaide, Hobart and Darwin. If the lobby was correct, quarantining should have adversely affected all capital city rental markets equally, not just two out of eight (even when factoring in a lagged response). There were confounding factors at work: rising interest rates, introduction of capital gains tax and a stock market bubble.

Oddly enough, while the lobby claims that quarantining will increase rents, the inverse is not considered: rents have escalated from 2006 onwards while negative gearing was in effect. Perhaps they could claim that rents would have been higher otherwise. This, however, is an ad infinitum argument; that is, negative gearing is not generous enough, so by increasing the scope of tax deductibility, it can serve to further constrain rents.

How much does negative gearing cost?

ATO data provides an estimate of the cost of negative gearing. In 1993-94 it was $850 million, fluctuating around the $1 billion mark over the next several years. As investors piled into the market, the cost rapidly escalated to a peak of $3.8 billion in 2007-08 before falling to $2.9 billion in 2009-10. Over the last seventeen years, negative gearing has cost taxpayers an inflation-adjusted $33.5 billion (2012 dollars).