Negative gearing again in Canberra's spotlight
Whenever the Federal Budget rolls around, the old chestnut of negative gearing invariably enters the debate. Both political sides will address it, following weeks of communications campaigns from interest groups.
Negative gearing, when investors offset costs on the maintenance and operation of their investment property against their individual income, is a regular bullseye in discussions around tax reform.
Prior to the 2016 Federal Election, LJ Hooker surveyed 1,700 of its landlords on the reasons why they chose property as an investment vehicle. Leading into the 2018-19 Budget, it’s worthwhile re-visiting the findings.
Far from property investment being the province of the well-heeled, the poll showed 37% of people who had their investment managed by LJ Hooker earned a combined household income under $100,000, while 67% had a household income of $150,000 or less. Now, anyone living in the most populous cities of Sydney and Melbourne, where living costs have risen exponentially in the last couple of years while wages have remained stagnant, would dispute whether households in these salary brackets couple be considered as ‘living it up’.
But here is the poignant point: 31% of investors indicated they would sell some or all their portfolio if negative gearing was abolished or restricted. This shows that property is a prominent way for many Australians to get ahead and if further restrictions are placed on it, investors already pay stamp duty and capital gains, we’ll see a dramatic exit. Lessening investment demand for property will potentially impact property prices and reduce the amount of properties available in the rental pool.
We’re already seeing a retraction in the number of investors in the property market. Recent Australian Bureau of Statistics data (December 2017 to January 2018) showed investor activity had receded 0.3 per cent over the month, due to tighter lending restrictions and higher interest rates imposed on investor specific mortgages.
A recent study by the PCA has found that the property industry - including construction, sales and rentals and related services - is one of the Australian economy’s largest sectors. It accounts for 13% of GDP and is Australia’s biggest employer with 1 in 4 people deriving their wage, directly or indirectly, from property.
From an employment perspective, restructuring negative gearing could reduce employment in several sectors. The real estate sector would require fewer strata and property managers and as rental properties require regular maintenance and renovations to meet regulations, a fall in demand would impact trades people, handymen and other service providers.
It is important to remember investors play an important role in the evolution and shaping of the Australian property market; they boost stock and provide much needed rental accommodation, with a reasonable portion of stock addressing social housing needs. Potentially, changes to negative gearing arrangements could see a significant demand on both state and federal governments to fund increased public housing requirements.
Targeting negative gearing is always an easy answer in the tax reform debate, but is it the right one?