Can a negative be a positive?
With affordability concerns mounting, could negative gearing be set for the chop?
The fact that Australia has a mounting housing affordability issue is hard to ignore. In Demographia’s 13th annual International Housing Affordability Survey, five of the nation’s capital cities ranked amongst the 20 most unaffordable in the world (Sydney 2nd, Melbourne 5th, Adelaide 16th, Brisbane 18th and Perth 20th).
The IMF, OECD and various global ratings agencies have repeatedly warned that Australia’s housing marketing is overheated and impacting on affordability.
Heeding mounting concerns, both federal and state/territory governments are doubling down on ways to address affordability in an effort to stave off ‘the Great Australian Dream’ of homeownership going the way of the Hills Hoist and the Polly Waffle.
For many regulators, economists and commentators, some of the blame for unaffordability lays at the feet of property investors. The argument being that the well-financed investor is muscling in on property that some see as being earmarked for first-time buyers or those with more modest cash reserves.
Efforts by the RBA, APRA and state governments to ‘cool’ the investor market – such as limiting bank investor mortgage lending, increasing the interest rates and rolling back some local incentives – continue to have some impact. However, investor appetite has quickly returned and investors now account for 50.2 per cent of all new home loans. According to the ABS, Australians borrowed $13.2 billion to invest in houses and apartments in January this year – up 27 per cent on a year ago.
From targeting local and foreign investors to increasing first-homeowner grants and incentives and stamp duty cuts, various measures have been implemented but affordability remains an issue – and one that is gaining ever-increasing political traction. As a result, tax incentives for property investors are back in government sights with both capital gains tax (GCT) concessions and negative gearing being targeted.
Despite GCT and negative gearing being ‘off the table’ in the lead up to the last federal election and the recent parliamentary inquiry into housing affordability making no recommendations to change negative gearing, CGT or stamp duty – there is a mounting push for a review.
State/territory governments have raised concerns over affordability and measures they and their federal counterparts can take to tackle the problem, with investor tax breaks front-and-centre. Even the IMF recently weighed in and suggested that tax reform may help to curb property price rises.
In March this year, the Australian Government announced it was considering options for a package of housing affordability measures. Amongst the options touted was capping the size of negative gearing deductions and cuts to the CGT discount.
It will be interesting to see how the Commonwealth’s package shapes up after consultation with property, housing and community groups, as while there are fierce advocates for limiting and removing tax incentives for investors, there is a very strong counter argument that the Government acknowledges.
Property investors are by and large responsible for the supply of rental accommodation. Almost 30 per cent of Australians are renters and private rentals account for the lion’s share (less than five per cent of new dwellings have been constructed by the public sector since 1984, according to CoreLogic’s A Profile of the Australian Investor – Who, Where and What?).
Figures from the latest REA Group Property Demand Index reveal that the current number of property investors is unable to provide enough rental properties (based on the high levels of demand on the rent section of realestate.com.au).
Measures that impact the attractiveness of property investment could result in fewer rentals being available and the cost of rents rising. In FY14, 61.8 per cent of Australia’s 2.6 million investors claimed a tax break for rental losses.
With the May Budget just around the corner, we won’t have long to wait to see which way the political and economic winds will blow for the investor.