By allowing ordinary taxpayers to deduct their losses from investing in residential property against their other (mainly wage and salary) income, the current system provides a significant tax incentive for people to invest in rental accommodation across Australia.
Encouraging this demand, by the simple laws of the market, does hold property prices higher than they would otherwise be. But it also ensures a significant supply of rental housing, which also holds down rents.
As the Treasurer looks at a range of measures to cut the deficit, there are reports that senior Labor figures have had discussions with some union leaders about plans to bring in measures that could change the current tax arrangements.
Suggestions have ranged from a new sales tax on property investors to cutting back the negative gearing incentives for investors who have more than one investment property.
The ideas are being mooted as part of a strategy to make housing more affordable — while at the same time they might have the advantage of cutting back on some tax concessions that, in theory, could also help to reduce the budget deficit.
While property markets will eventually react to changes in tax arrangements, any changes will involve some risky politics.
There is a real danger that a “soak the rich” style approach to cutting back negative gearing will lead to a significant reduction in the availability of rental housing, which will only be overcome — over time and after some significant market disruption — by an increase in rents.
The people most likely to be hit by the dislocation of the investment housing market as it adjusts to cope with new tax changes — and expected future cutbacks on tax concessions — will be those who can least afford it. . . people who rent.
Those investors who might be discouraged from the investment housing market by the changes can just as easily sit back and put their money into a term deposit and get 6 per cent risk-free guaranteed (as opposed to the current average rental yield on investment property of between 2 per cent and 4 per cent).
They will have none of the hassles of dealing with tenants and real estate agents, nor will they have to pay stamp duty, land tax, conveyancing fees, insurance and repair bills.
But for the millions of Australians who will be making the decision of whether to buy or sell residential property in coming months, Swan needs to make the federal government’s position clear.
If not, would-be sellers would be better off getting rid of their property as fast as possible and buyers would be wise to hold off buying until they have a clear guarantee about what the federal government’s plans are.
Any change to the current negative gearing arrangements would only mean one thing — cutting or eliminating the tax benefits of investing in rental property.
With property prices cooling off in many areas, some investors are already rethinking their plans for investment in residential property — even with the incentive of the tax concessions provided by negative gearing.
Any further changes — or feared changes — could see a rush by investors for the exits.
Even a small reduction in the government’s tax concessions could lead to a much more substantial reduction in investment.
Investors who look at residential real estate as a long-term investment might well take the view that any announcements made this year may be the thin edge of the wedge, the beginning of a more substantial cutback in the negative gearing arrangements in coming years.
And with property, as everyone knows, in a falling market, it is a case of first out, best dressed.
As the latest figures from the Australian Taxation Office show, there are almost 1.7 million taxpayers out of a total of 12.3 million in Australia who report they have at least one rental property.
A rough calculation of figures provided by the ATO of how many taxpayers have one or more properties shows that these 1.7 million taxpayers own at least 2.3 million properties.
Put a potential 2.3 million properties on the market across Australia and one will certainly achieve a big fall in property prices.
That, or some version of it, may be what those advocating a cutback in the current concessions are trying to achieve. But there will be a lot of market pain getting there for everyone with an exposure to the housing market.
For a start, it could also take out of the market a potential 2.3 million properties that are currently occupied by renters.
Over time, of course, the total rental market will decline somewhat as lower house prices will make it easier for some existing renters to buy their own home.
And rents will rise to the point where investors may be willing to come back into the market.
Of course, an abolition of negative gearing would not suddenly result in 2.3 million properties coming on the market, because not all investors will decide that having money in residential property is no longer worthwhile.
But the figures do provide some indication of the potential implications for any treasurer who starts to tinker with the system.
The ATO figures show that almost 1.2 million taxpayers have only one investment property.
A decision to cut out negative gearing for those with more than one property, according to the ATO figures, would affect 475,000 taxpayers.
These collectively own at least 1.1 million properties, which is still a fair swag of real estate that might come on the market if investors with more than one investment property were discouraged.
And for those who think that investing in residential property is only a rich man’s sport, the figures show that by far the biggest swag of properties are owned by people earning $80,000 a year or less.
As the accompanying table shows, there were just over 1.1 million taxpayers in 2008-09 (the latest figures available) who hold rental properties that are losing money (in other words, the cost of interest and other expenses outweighs the rental income).
These are the ones, of course, who are taking advantage of negative gearing.
Of those, the biggest single grouping is people who are earning between $34,000 and $80,000 a year. Just under 80 per cent of the total number of taxpayers who own properties that are losing money earn $80,000 or less.
Story by Glenda Korporaal www.theaustralian.com.au/
Tags: economy, finance, investment, money, real estate