By Nathan Atterton and Richard Schonell. 19th June 2016.
Our goal is to provide an accurate summary of where the parties stand, but we advise that you also read more broadly and verify other sources of information before deciding who to vote for.
The lowdown – negative gearing and housing affordability
Young people today are facing a housing market that’s almost impossible to enter. Why?
Because housing in this country has become prohibitively expensive.
On this point the stats don’t lie. Last year Australian homes were the third least affordable in the OECD and Sydney is now the second most expensive city in the world to buy property. The big losers are (of course) young people. In 1982, 56% of people aged 25 to 34 owned their own home. Today, its only 34%.
The good news? Politicians are finally starting to respond to the crisis. Labor and the Greens believe negative gearing is partially to blame and have pledged to reform the loophole.
But the story isn’t quite that simple. Below we will take a closer look at negative gearing, housing affordability and each party’s stance on this controversial issue.
So what is negative gearing?
Negative gearing is a tax break that allows the owner of a rental property to claim a tax deduction on their personal income where income generated from the rental property is less than the cost of owning the property.
Say you (just kidding, your parents) own an investment property. Money that is spent on that property is considered a loss by the Australian Taxation Office (ATO).
Losses can include:
- paying interest on the loan they took out to purchase the house,
- paying for renovations on the property,
- paying legal fees relating to the property,
- paying for a handyman to fix a leaky sink
- or one of the many other expenses recognised by the ATO.
If these losses are higher than the rent received from the property, the difference can be deducted from the property owner’s other income to reduce their tax bill.
Here's another example that will hopefully make things clearer.
Assume the average loss on an income property is $10,000 per year (fun fact: it is).
If someone who owned a rental property earned a taxable income of $100,000 and spent $10,000 on their property, negative gearing would reduce their taxable income to $90,000.
About 1.25 million taxpayers use negative gearing to reduce their taxable income in this way,.
In all, that represents about $11 billion in foregone taxes.
So, what’s the big deal?
By enabling investors to reduce their taxable income, negative gearing makes investing in housing relatively more attractive than other types of investment. This has seen the the property market saturated with investors who, by competing with each other to buy properties, have driven the cost of housing up.
The end result?
House prices have increased by 147% since 2001 - even though incomes have only gone up by 47%. This means the average priced house now costs about 7.5 times the average annual income (in Sydney its about 10 times) even though the average home only cost 4.7 times the average annual income in 2001.
What are the parties doing about it?
Labor and the Greens have made negative gearing a key issue by arguing it is unfair, excludes people from the property market and wastes money that is better spent elsewhere.
The Coalition has defended negative gearing by claiming it encourages the construction of new houses, sets up people for retirement, saves private individual's money and keeps rents low.
The actual policies are as follows:
The Liberal National Coalition has a policy to not make any changes to negative gearing. They claim it would increase the tax burden of families who are merely wishing to invest and provide a future for their family through property.
Labor’s wants to reform negative gearing so that you can’t negatively gear a property built before but purchased after 1 July 2017. From that date, only newly built houses can be negatively geared. All investments made before this date can continue to be negatively geared.
The Greens propose to fully abolish negative gearing. It would use the budget savings it creates to implement a new social housing scheme.
The Nick Xenophon team argues for the establishment of a housing affordability taskforce, tighter rules regarding foreign investment, and policy modifications to encourage the creation of affordable housing stock.
Getting rid of negative gearing is a good thing, right?
Unfortunately it's not quite that simple.
Defenders of negative gearing say it provides an incentive for people who already own one property to buy more. If you remove this incentive, so the argument goes, house prices will decrease because there will be less buyers competing with each for houses. This would mean that people who already own a home might see the value of their home decrease.
Defenders also argue that changes to negative gearing would deter people from building new houses for Australia’s growing population and that rents would increase due to less housing stock.
On the other hand, critics of negative gearing say it distorts the housing market, unfairly advantages the wealthy and deprives the government of tax revenue that is better spent elsewhere.
Making sense of these perspectives is incredibly difficult because negative gearing has been heavily politicised. Political parties and a number of lobby groups have made some wildly inaccurate claims and separating fact from fiction is very difficult.
The impact of negative gearing on rents, for instance, is very controversial. Defenders of negative gearing point to what happened in 1985 when the Hawke Government clamped down on negative gearing. They refer to Sydney and Perth, where rents increased, as a good reason for keeping negative gearing as it is.
Critics of negative gearing see things differently. They argue that those increases were related to other factors, and use the example of Melbourne, where rents remained the same, and Adelaide and Brisbane, where they actually decreased, to argue that the effect of removing negative gearing on rents is minimal.
The impact of removing negative gearing on home values is also disputed. Some lobby groups have claimed it will decrease prices by 20%, others by 1%.
Where to from here?
The two major parties have sought to make negative gearing a clear point of difference. Each has advanced a very different vision of the future direction housing policy in Australia should take.
A vote for the Coalition ensures negative gearing stays the same.
A vote for Labor ensures only new properties can be negatively geared from 2017.
A vote for the Greens removes negative gearing entirely.
So, as a person who currently requires shelter and/or is hoping to one day buy a house, we strongly encourage you take a look at each party’s position, decide which appeals to you most and reward them with your vote.