Attacking the practice of negative gearing appears to have become a bit of a sport lately. On the 14th March, an article in the Herald Sun stated the government “should look at ways to overhaul an extremely generous system of negative gearing”, and on the 20th March, The Age ran an opinion piece entitled “It’s time to apply the brakes to negative gearing”.
I could speculate that the attention property investors (and their tax deductions) is due to the combination of increasing rents (driven by low vacancy rates) and high property prices (driven by a long stint of housing affordability). However, the cause is not important, and what is important is understanding why negative gearing is an effective housing subsidy.
In the Taxation StatisticsÂ 2005-06 publication from the ATO, we can see that:
- There were 1,561,630 people who declared rental income on their personal tax returns.
- 66.5% of those had a taxable loss (net return income less than zero) from their rental properties.
- There were 2,146,685 property schedules completed for those tax returns (note: where multiple people own a property, multiple schedules may be completed for those properties).
And in the Census 2006 QuickStats for Australia from the ABS, we can see that:
- 27.2% of occupied private dwellings were rented, which corresponds to 2,063,947 dwellings. (Pretty close to the 2,146,685 figure above.)
While in the Australian Social Trends 2007 from the ABS:
- There were 394,000 first home buyers in 2003-04.
So, from that barrage of stats, it should be clear that the number of renters outnumbers the first home buyers (in any one year) by over five to one, and the number of renters combined with the property investors outnumbers them over nine to one. Why compare with the first home buyers? Because they are really the only housing segment that is disadvantaged by negative gearing. Beneficiaries include renters, existing home owners, investors and the state governments (through higher land tax and stamp duty fees).
Renters have their rent subsided by the ATO, though the tax deduction on costs provided to their landlords. What other business but property rental is regularly undertaken at a loss? It should be admitted the “obvious” effect of removing the deduction – rising rents – is unproven.
I would expect it to be likely that rents would rise, both from scarcity due to fewer landlords willing to operate without such a deduction, and from those willing to be landlords increasing their rents to maintain their investment yields. However, back in 2003, the ANZ’s Saul Eslake analysed the last time negative gearing was removed (by Paul Keating, between 1985 and 1987) and commented that:
It’s true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn’t show any discernable increase in the other State capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals.
So history is inconclusive. And, rents aside, although you might think that renters would benefit from being able to escape the rental market, many of them don’t want to. A survey by AAMI published on the 3rd April indicated that 39% of renters are “happy to rent and have no plans to have a mortgage.”
Existing home owners benefit from rising house prices since while prices go up, their morgage does not. Although when they come to buy another house, they will need to pay higher prices, they will typically sell their old house into the same market. Also, at some point, they will exit the housing market, and benefit from selling their house without having to buy one.
And that brings us to the conclusion. The group of people able to remove negative gearing are democratically-elected politicians. It’s highly unlikely that such a person will remove a policy that benefits so many, particularly when it’s a Labor government and renters are one of groups that benefit. True, it was a Labor government that removed it last time, but that also means they will clearly remember the embarrassment of having to reinstate it.