More cops use negative gearing than lawyers

John Daley from the Grattan Institute and I talk about the types of people who are negatively gearing and the impact if it was abolished.

Introduction: More cops use negative gearing than laywers

Ross Greenwood: As you know a lot of people right now are saying that really a lot more should be done to allow first-time buyers into the market because the number of first-time buyers has dropped below 10%. Now, some say maybe it should be that negative gearing rules need to be changed. But if you change negative gearing rules, who would be affected by that? Well, that’s some work that the Grattan Institute has done. What they say is that the latest tax office figures show that more emergency service work, we’re talking police officers, we’re talking ambulance drivers, firefighters, that they are more likely to have a negatively geared investment property than lawyers are. Get that?

You change negative gearing rules, you might affect people who are really the backbone of the country. You might not necessarily be affecting people who are at the top end of this nation. Anyway, we took your calls about this as to whether your super should be allowed to be used to buy your first property. That went off big last night. 131873. We might do some of those calls tonight. I think that our next guest the Chief Executive of the Grattan Institute, John Daley, might also stoke that fire just a little bit more as well. He’s on the line right now. Many thanks for your time as always, John.

Interview with John Daley, Chief Executive of the Grattan Institute

John Daley: It’s always a pleasure.

Ross Greenwood: All right, let’s go to some of these tax stats that have come out from the tax office. It does show that people who would be called more median income earners in Australia are the people who are making tax gains as a result of negative gearing property. Why would you, therefore, advocate the negative gearing rules have to change?

John Daley: Well, I think one of the things we have a misguided view of how much Emergency Service Workers get paid. Many of them are on substantially more than $100,000 a year, and consequently, they’re nothing like a median income earner. Often, they’re actually doing a lot better that. Now, not typically doing better than lawyers but they are typically doing a lot better than nurses or hairdressers.

Ross Greenwood: The other point I’d say to you, John– And look, I’ll be the devil’s advocate here with you and that is if you change negative gearing rules, it does not put more housing or more affordable housing into the marketplace. All it does is changes the tax mix. Maybe for some of those middle income earners or even middle to higher income earners, it just means that they will not have the chance to buy an investment property. That would then be the prevail of only those people on very much higher incomes. Is that a reasonable thing to suggest?

John Daley: Look, by definition, if you change negative gearing capital gain to tax rules, you’re not going to have a big impact on the number of properties that are there. You are going to change how many of them have owner occupiers rather than investors. I don’t think you’ll get a big shift in the kind of people that invest in property. I think it’ll affect them across the board, indeed, of very high income people, people like surgeons and anaesthetists they tend to be a lot more likely to negatively gear than anybody else.

Chances are if you change the rules there will be some other people, at least some of the time, who decide not to invest. Of course, the people who will win again at the margins will be people who are currently locked out of the property market who wind up being the people who win at the auction when previously they would have just missed out.

Ross Greenwood: Isn’t the answer to this simply we’ve got to get more decentralization? People are ultimately going to get spat out of our big cities if they can’t afford it. That big cities around the world, you go Tokyo, New York, go to London, go to Paris, any of these are expensive cities to live in.

John Daley: That’s right. They’re expensive precisely because so many jobs are getting created in these big cities and particularly towards the center. One of the things we can see from those tax stats that have been released is the way that, disproportionately, the number of people with jobs who are paying tax obviously is increasing much faster in the cities, particularly towards the center of the cities, than anywhere else. It’s ultimately the decisions of employers about where they want to set up businesses and that’s disproportionately in these big cities that’s driving where people want to live, which of course is driving the price of housing.

Now that said, there are policy things that we can do that will make it more affordable than it would be otherwise for people to get into the home ownership market. Obviously, there’s the tax incentives that we’ve talked about. It’s also worth remembering the big reason for changing those tax incentives is not just that it will improve housing affordability at the margins, they’re also worth a lot to the budget. We’ve got budgets that have got big problems and these are policies that are struggling to find any kind of plausible rationale.

The other things that we have to do, though, and probably the more important things in the long run around supply, ensuring that we make it easier to subdivide and create additional places to live in the places that have good access to jobs. It’s no good just creating extra dwellings right on the edge of our cities, which by and large, have very poor access to jobs. We have to create extra houses in the inner and middle rings of our cities because those are the places that have good access to jobs.

Ross Greenwood: I’ll tell you what. That’s a quarter-acre block, it ends up becoming an eighth of an acre or less if you start to subdivide to try and fit the people into some of those middle suburbs as well. Given the fact that Scott Morrison, John Daley, has indicated today that there will be no change in negative gearing rules under the government’s policy, and there quite clearly is a starkly different policy from the Labor Party, politics ultimately becomes a big thing in all of this, doesn’t it?

John Daley: It does. Although it’s worth remembering that Scott Morrison has not apparently yet ruled out changes to capital gains tax. In the scheme of these reforms, actually changes to capital gains tax would have a bit more of an effect than negative gearing, both in its contribution to the budget and in terms of at the margins pushing housing from investors to home owners.

Ross Greenwood: I’ll tell you what, John, while you’re there let’s give people just a quick lesson on that and how the capital gains tax works. Basically, let me get this right or wrong. In the old days it used to be if you bought an asset and you held it for more than 12 months, you basically could take away the cost of inflation off your gain. Therefore, as a result, your gain would be reduced and then added to your income and then whatever tax rate that came at it, that would be the tax rate you pay on that excessive capital gain. These days, you split the capital gain in half, 50%, and basically that is the element of which you pay the capital gains tax on at your marginal tax rate. That’s pretty much the way it works, isn’t it?

John Daley: That’s right. Of course, as things have turned out, that’s been a very beneficial change for homeowners. If you think about someone who’s bought a property in Sydney and just held it for a year, under the old rule Sydney property prices have gone up by about 19%. Let’s say, they bought it for a million dollars, big house. It’s gone up by call it 20% which is roughly speaking what Sydney house prices have gone up by.

Ross Greenwood: $200,000 over the past year.

John Daley: $200,000 in a year. Under the old rules, they’d have paid tax on $180,000 worth of that. They would have only got– just two percent would be taken away because that’s cost of living.

Ross Greenwood: Very little in the old scheme of things.

John Daley: That’s right, in the old world. Nowadays, they’re taking off half. They’re only paying tax on $100,000 worth of it. This change to a discount of 50% rather than just discounting it by inflation has been terrific for anyone who’s bought property over the last couple of years.

Ross Greenwood: In particular, those who have been able to speculate. That’s another important one as well. It’s going to be fascinating. We’ll keep in touch in regards to this because I think this is such an important issue to really address and ask where does the supply for housing come from as we raise the population? Also, who are the people who are going to buy these properties?

One small thing I’d suggest, John, is you want to stop speculation, you’d actually stop superannuation funds, in other words, self-managed superannuation funds, from borrowing money. That was a thing previously. Stop that and I think in fact superannuation funds as much as foreign investors have been partly to blame for the big rise in these capital city house process.

John Daley: They’re certainly contributing to it. Of course, one of the recommendations of the Financial Services Inquiry a year or so ago was then funds again be prevented from borrowing. There’s no question it would take some of the heat out of the housing market.

Ross Greenwood: There you go, John Daley, the Chief Executive of the Grattan Institute. He’s thinking about this. But I want to tell you a couple of bits and pieces from these tax statistics released today. Say, for example, here are the postcodes or the suburbs in Australia where you have the highest average taxable income, all right. The highest taxable income in Australia is the postcode 2027, that’s Darling Point, Edgecliff, Rushcutters Bay and Point Piper in Sydney. The average income there $189,000.

Number two in Sydney 2030, Dover Heights, Rose Bay, Vaucluse, Watsons Bay. Average, a 185,000 give or take. Then we go to Victoria, Hawksburn and Toorak, 3142. 10,200 individuals there, average income $173,000. Then, we go to Bellevue Hill, 2023, $163,000. Then, 3944, does anybody know that postcode? Portsea in Victoria. 437 individuals, average income $156,000. Then to Mosman, Spit Junction to Hunters Hill in New South Wales to Northbridge in New South Wales, then to Cottesloe and Peppermint Grove in Western Australia, 6011 and then Woollahra. It’s interesting. The people– The occupations that have the highest income on average in Australia, surgeons $377,000, followed by anesthetists $341,000, Internal Medical Specialist $281,000, financial dealers $235,000, psychiatrists $204,000, then other medical practitioners, judicial and legal professionals, mining engineers, Chief Executives and Managing Directors and Engineering Managers, rounds it out– There you go $377,000 for surgeons. That’s what you get. Most of those probably live in Darlingport, Edgecliff, Rushcutters Bay or Point Piper as well. We’ve got more Money News coming up.


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