Negative gearing changes ‘could tip Australia into recession’, warns John Symond
A number of housing industry insiders have issued a warning about curbing negative gearing, with mortgage company boss “Aussie John” Symond saying “it could tip Australia into recession”.
- Labor’s rule change would not affect people who are currently negatively gearing properties
- The UBS’s chief economist said he was worried about the effect the change would have on the economy
- But some argue negative gearing “is very important for someone who is just starting out”
Labor promised if they won the next federal election they would reform negative gearing so it only applied to investors buying new properties.
The idea, first pitched by Labor leader Bill Shorten before the last federal election, is that this would give first home buyers more opportunity to get into the housing market.
“We will put the great Australian dream back within the reach of the working and middle class Australians who have been priced out of the housing market for too long,” Mr Shorten said in 2016.
Labor’s rule change would not affect people who are currently negatively gearing investment properties.
But Mr Symond, the founder and non-executive chairman of Aussie Home Loans, said caution was required.
“You’ve got to treat negative gearing very carefully and do your homework to work out what the ramifications will be,” he told 7.30.
Opposition Leader Bill Shorten plans to change negative gearing if Labor wins the next federal election. (ABC News: Nick Haggarty)
Chief economist at UBS George Tharenou also said he was worried about the effect the change would have on the economy.
“My concern would be that if you were to make a material change to tax policy at the same time as banks are tightening lending standards, it could exacerbate what’s already a downturn into something more serious,” he said.
Head of Asia Pacific research at data company CoreLogic Tim Lawless said the proposed changes would result in less investment in the housing market.
“We could see more investment demand funnelled into new housing, but of course we know that buying into a new housing market is fundamentally higher risk than buying into the established market,” he said.
“New housing quite often has a long settlement period, particularly if you are buying into the apartment sector. Anything can happen between when you sign your contract and go to settle.”
Labor is also proposing to halve the capital gains tax exemption from 50 per cent to 25 per cent. This means when investment properties are sold, 75 per cent of the profit would be taxable.
Who benefits from negative gearing
There is much debate over what effect the proposed tax changes would have on a housing market already facing its worst downturn since the GFC.
“It’s simple. If you own your own property, under Labor’s policy it will be worth less. If you rent your home under Labor’s policy you will pay more,” Treasurer Josh Frydenberg said in a social media post last month.
Almost 1.3 million Australians own a negatively geared investment property, and more than half of negative gearers earn less than $80,000.
According to Mr Frydenberg, among those using negative gearing “are 58,000 teachers, 41,000 nurses and 20,000 police and emergency services”.
But it is the wealthy who benefit the most. The top 20 per cent of those negatively gearing get 53 per cent of the benefit, according to the Grattan Institute.
“Negative gearing provides an opportunity for all taxpayers to reduce their income and incentivises them to invest in property, but the benefits of those gains have been relatively concentrated,” Mr Tharenou said.
“Higher-income people pay more tax and that’s the way the system works — the more tax you pay, the more tax you save. So the benefits were always going to be skewed towards higher-income households.”
In 2016, the Coalition’s campaign against Labor’s changes suggested rents went up when negative gearing was briefly abolished on rental properties by the Hawke-Keating government in 1985.
Rents did rise in Sydney and Perth, but it was not clear that removing negative gearing was to blame.
“I don’t think the ’85 period really gives us any context of what may happen with negative gearing removal now, simply because it was such a short period of time,” Mr Lawless said.
“It takes a lot longer for rental markets to respond to changes in supply, it doesn’t happen instantly.”
What is negative gearing?
Negative gearing allows property investors to deduct property expenses from their taxable income. (ABC News: Liz Pickering)
Negative gearing has been available in Australia for much of the last century, but only widely used by property investors since the 1980s.
It enables investors to deduct property expenses from their taxable income where they add up to more than is earned from rent. Deductions can include interest payments on a loan, necessary maintenance and depreciation on a property’s value.
For example, say you earn $100,000 annually and pay a bit less than $25,000 in tax per year.
You buy an investment property which earns $50,000 a year in rent. If your interest payments on that property are around $60,000 a year, you can deduct the difference of $10,000 from your taxable income.
Which means your taxable income would drop down to $90,000, which would reduce your yearly tax bill to roughly $21,000.
While you are still not out in front, you do get $4,000 back in your pocket.
Happy to see negative gearing removed
Kathy Ran bought her home in 1988 and paid it off in five years. Now she negatively gears an investment property, but supports Labor’s planned changes.
“I would be in favour of it getting removed even though I benefit from it, because I see how difficult it is to get into the property market for people who aren’t already in it,” Ms Ran said.
“It’s not all nurses, and it’s not all police officers who are investors. What the negative gearing tax breaks allow that small proportion to do is get everybody to pay for their losses, so I don’t think that’s fair.”
Ms Ran said she would like to see a more level playing field.
“I’d like to see more first home buyers get into the market, and I’d like to be able to visit my children and my grandchildren in their own homes.
“I want the future generations not to have to rely on the bank of mum and dad to be able to get into the property market.”
‘It’s important for the middle class’
Alex and Emily Truong use negative gearing to help them save to buy more property. (ABC News)
Couple Alex and Emily Truong are against changing the negative gearing rules.
They earn about $150,000 a year between them and live in a rental while they rent out the house they own.
“Having negative gearing just allows us to save enough money that little bit quicker,” Mr Truong said.
The couple is saving to buy more property.
“I think negative gearing is very important for someone who is starting out,” Ms Truong said.
“Sometimes the extra $5,000-$6,000 to minimise your tax could help you go further.
“I think it’s important for the middle class, like us, working very hard, trying to have a better future for our children.”
Watch part three of 7.30’s housing special tonight on ABC TV and iview.