Here we go again. This week the Prime Minister prevaricated when questioned about re-introducing changes to negative gearing and capital gains tax (CGT). The media was quick to react, mindful that this is a white-hot political topic super-charged by the current hyperbole over Australia’s housing challenges.
On one side, those that would seek to abolish or change negative gearing or CGT such as the Greens and left-thinking economists point to the cost to government, potential revenue lost through tax concessions and (by discouraging investors) lowering house prices making it more affordable for first home buyers. These are admirable pursuits but not without challenge.
Rewind to 2019 election campaign when the then would-be treasurer, Chris Bowen said, “Don’t worry if your property value falls,” when quizzed about Labor’s tax policies. I cannot imagine how the electorate could possibly think they’d be okay with this idea given household consumption makes up about 45 per cent of the economy and if housing values fall, so does their spending and so does, therefore, the economy. Bowen’s comment was telling as was the PM’s prevarications this week because property investors are considered aspirational and therefore fair game for Labor’s efforts to appeal to Greens voters.
If Bowen had said, “Don’t worry if your rent goes up,” he’d have been in trouble, but the truth is that both comments are the same. Abolish negative gearing on established homes and
prices will fall and rents will rise
Any plan to mess with the current negative gearing provisions is fraught because it is deeply entrenched (it’s been part of our tax system for more than 100 years) and therefore interlinked with our vast and complex tax system. Tinkering with one part of it inevitably impacts on others. What about losses incurred across other asset classes such as businesses or shares?
Any wind back to existing rules would mean existing investor-grade housing stock would be ignored as an investment option rendering them unsaleable whilst putting pressure on the supply of rental properties. I predict that owners of investor grade stock would lose a quarter of their value immediately and it will take more than a decade for prices to recover.
If there was a plan to grandfather the rules, investors holding existing homes will simply not sell putting pressure on supply in established areas forcing tenants to outlying areas away from the developed parts of our cities encouraging urban sprawl.
The States would have much to lose too as it will be them and their taxpayers that will need to come to the aid of those no longer able to afford the rent and provide them housing in a system already short on supply and resources.
About 80 percent of investment properties are owned by mum and dad types who only have one investment property. They are the champions of delivering affordable rental homes to millions of Australians. Governments have failed to deliver enough houses for a variety of reasons and there is little chance they’ll get close to delivering the promised 1.2 million homes by 2029.
With fewer everyday investors, rents rise and if government can’t provide the housing, why discourage those that can?