Independent Economist Saul Eslake discusses changes needed for negative gearing and capital gains tax for housing affordability
Negative Gearing Reform – Saul Eslake
Ross: In the meantime, the government is out trying to find ways to promote affordable housing in this nation. Now, it stopped short of any changes to negative gearing, but certainly Scott Morrison wants something which is almost called a community housing-type arrangement where bonds are issued. There’s even suggestions. Let’s say, for example, developers, market finance, if they hold back a certain proportion of an apartment block for housing that would be rented, they would continue to line up. That will be financed accordingly.
Even talk about what happens with superannuation, but no talk about any form of changes to tax policy in regards to this policy that the government is going to put out. The key part of this will occur in the federal budget, which is now coming up in just on four weeks time. One person who continues to talk about changes to tax policy and negative gearing is so less like. He was the former chief economist for the ANZ Bank, but also the Bank of America Merrill Lynch, and now an independent economist and vice chancellor and fellow at the University of Tasmania. He joins me now.
Many thanks for your time, Saul Eslake.
Saul: It’s a pleasure, Ross. Thanks for having me on.
Ross: Can you just explain to me why is it that you continue to argue that there should be a change, negative gearing when again, today, that the federal treasurer has completely ruled that out?
Saul: Well, the government sometimes change their mind in response to sustained pressure and the accumulation of evidence. Well, you might say, “Hope springs eternal.” I continue to hope that the government will eventually change its mind on the score or some alternative government with the different set of policies will.
I’ve been arguing for a very long time that one of the reasons, not the only one, but one of the reasons for the declining home-ownership rates over the last 25 years, particularly among people aged between 25 and 55 with the time span on average of almost 10 percentage points in home-ownership since then, has been the increasing competition that they face from investors, who advantage to a degree that has almost no parallel internationally, as the Reserve Bank has been saying, by Australia’s preferential tax arrangements.
Not just the availability of negative gearing, but also the very generous discount that applies to capital gains when investment properties are sold.
Rental Yields on Properties
Ross: There’s one aspect about this, Saul, and I’ll pick up with you here. That is, let’s say, for example, the rental yields on properties right now are so low. Also, the interest rates are so low that I would suggest, unless people really did have very little equity in that property, there’s not very much negative gearing taking place. A vast majority of people, if they get a little bit of modest rental increase over a period of time, are going to be either neutrally geared or positively geared. In other words, making money from that property on income basis very, very quickly.
Saul: Well, the treasurer said today, and I’ll quote directly from the figures that he gave, that there are two million individual taxpayers who report rental income. That is who are landlords. Out of those 1.3 million are negatively geared. That is about two-thirds of all property investors. This will have been for the 2014-15 financial year. He’s seen those figures, but the rest of us don’t get to see them until later this month.
About two-thirds of property investors are negatively geared. I guess for some investors, the response to very low interest rates that might have left them unintentionally positively geared has been to go out and borrow more money and buy more properties so that they again become negatively geared and maximize the advantages, which the tax system provides to them.
The point I keep making about this is that, 25 years ago, when the ideas first began publishing figures on housing finance, first-time buyers and investors each got about 18% of the total value of housing lending taking place. With the other 64% going to people who were homeowners trading up to the second or subsequent new homes. Today, the share of housing lending going to first-time buyers is for under less than 10%, less than 5% in New South Wales, while the share going to investors has risen to more than 45%.
I think that is unequivocal evidence of the extent to which first-time buyers have been squeezed out of the market by investors. Those would have been first-time buyers in previous generations are now renting from the investors who squeezed them out, so it’s a case of tax-induced supply inducing its own reluctant demand.
Ross: That also calls an issue for renters as well. Saul Eslake, independent economist and vice chancellor and fellow at the University of Tasmania. As always, we appreciate your time, Saul.
Saul: Thank you very much for having me. I appreciate the opportunity.
Ross: It’s going to be interesting to watch this because the thing to see is whether, in fact, it’s only one likelihood. That is if the Labour government gets in, and remember that the government is in something like an electoral mess right now when it comes to the polls, but then you could get those changes to negative gearing. Anyway, I want to pick up a couple of bits and pieces from today in regards to these policies. Here is the treasurer, Scott Morrison, talking about basically the budget and the fact that it’s not going to be fixed quickly or easily in regards to these changes to his housing policy.
Scott Morrisson, Treasurer
Scott: One budget will not turn these issues around in isolation, but it can make a good start. There are no single or easy solutions. The payback on these measures is achieved, in some cases, over a generation. Not an electoral cycle, not a budget cycle.
Ross: That’s the treasurer talking about that, but I want to pick up the opposition here. Because quite clearly, given the way the policy right now, the Labor Party’s view of all this is important. Here’s Chris Bowen, the Shadow Treasurer.
Chris Bowen Shadow Treasurer
Chris: He says there’s a need for a concessional savings vehicle in a fetch for young hospice. His government abolished first-time owners’ saving accounts, so this is a government which has been worse than a slip at the wheel when it comes to housing affordability.
Ross: That is Chris Bowen there. Anyway, let’s go back to the treasurer, Scott Morrison, because he claims he actually understands what it’s like for people not to be able to afford to get into their own home.
Scott: I’m very interested and understanding the frustration of young Australians trying to buy their first home. I live in a city where that’s been lifelong experience. I really get it, went through it. But when we focus on the housing market, we can’t just focus on that issue alone because the consequences of that fall through to the most vulnerable into our community.
Ross: Yes, it’s interesting. I will take your calls in this tonight, 131-873, about whether it’s right, should negative gearing go, is the treasurer on the right track here. In other words, how do you improve affordability? Just one other point to observe today, and that is if you have a look at the number of home loans extended to owner-occupiers, it was down by half-percent in February. Just three months of gains.
The other point also is to bear in mind that the number of investment loans, this actually fell significantly down 5.9% in February. Maybe the regulators of the Reserve Bank, the Australian Prudential Regulatory Authority, APRA, maybe their message is getting through and that is being pulled back.