Abolishing negative gearing a recipe for disaster

Long ago the Spanish philosopher, George Santayana, said those who ignore the lessons of history are condemned to repeat them. The Housing Industry Association can only assume that the Business Coalition for Tax Reform has thrown away the history books in developing its latest proposal: to trade off negative gearing for personal tax cuts. The proposal, which is naïve in the extreme, ignores even the most basic principles of demand and supply.

The “experts” behind this proposal clearly have no direct experience of what happened in 1985 when the Hawke Labor Government briefly removed negative gearing. Suddenly mums and dads, taking positive steps to fund their retirement, were unable to recoup some of their initial losses common when borrowing to finance their investment property.

As a result, construction for the rental market closed down virtually overnight, the stock of existing rental dwellings declined precipitously as investors dumped their property and rents soared. Faced with a social disaster Labor back-pedalled and fully restored negative gearing in 1987. Even so, it was several years before many investors ventured back into property and sanity was finally restored to the rental market. In the current climate, where there is already a tight rental market with low vacancy rates, removing negative gearing would spell disaster.

One would have hoped that the lessons of less than two decades ago would still be fresh in the memories of those entrusted to provide credible alternatives to the prevailing tax regime. Apparently not for the Business Coalition.

The number of investors in the housing market has increased dramatically over the past decade, delivering much-needed supplies of rental accommodation. However, arguments in some quarters suggest this rise fuelled the housing boom and the associated affordability crisis. The boom is over and any housing bubble people perceived has quietly deflated. The Business Coalition’s proposals would turn an orderly and manageable return into a rout with severe implications for everyone who owns property in this country.

Investors have moved to housing partly because it presented an attractive proposition in the first years of the 21st century; but also because other options, most notably the share market, were less buoyant or just too complicated. All signs point to cyclical forces restoring the balance.

Vacancy rates provide clear evidence of the folly of creating any disincentives to investing in rental property. Despite the building boom, vacancy rates in every Australian capital city remain below 3 per cent with Perth the lowest at 1.6 per cent and Sydney, the easiest for renters, still at a miserly 2.8 per cent.

And the vacancy trend continues downward. In the year to September 2005 vacancies reduced in six of the eight capitals.

Low vacancy rates inevitably result in rising rents and in seven of the eight capital cities the rent for a standard three-bedroom house rose at a rate in excess of the Consumer Price Index. In Perth the average renter was paying a staggering 26 per cent more than a year previously.

Rental rates for two-bedroom units rose at a faster clip than the CPI in all eight capital cities - in five, more than twice the rate of the index - with Perth once again leading the way on 17 per cent.

This comes at a time when state governments are reducing expenditure on public housing in the hope that the private sector can take up the slack. To cut negative gearing at this point, sending already rising rents spiralling into the stratosphere, would be a savage and irresponsible blow to those Australians who can least afford it.

HIA is not alone in condemning such a proposal. The association is not part of the Business Coalition, but the Master Builders Association was - at least until recently, when it resigned following the release of the negative gearing announcement. Chief Executive Officer Wilhelm Harnisch stated that the position on negative gearing made the MBA’s continuing membership “untenable”.