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Saturday, 27 October 2018

The ALP’s negative gearing policy in the run-up to the 2019 federal election

The other day I had a long Twitter conversation with a person who ended up huffily insisting I refer to him as “professor” because he is an academic at an Australian university. I had merely referred to him by his surname but he evidently though I wasn’t displaying enough deference. His field is one that is completely divorced from the thing we were talking about, which was the ALP’s policy on negative gearing and capital gains tax exemptions. I have seen this person on TV on a panel show and in general he is left-of-centre politically. He is American.

The conversation covered a lot of ground but his main problem with negative gearing seemed to be a belief that people buy properties and leave them unoccupied, so relying merely on the capital gain the property would attract to offset any loss they might incur from eschewing rent. He seems to think that Australians routinely buy properties and leave them empty, thus pushing up rents. But the evidence does not suggest that this practice is at all widespread. In a 2017 story published in Domain, Dr Cameron Murray, an economist specialising in property markets and environmental economics who taught at the time at the University of Queensland, said that out of a total of 9.7 million homes in the country about 300,000 properties were empty at any one time, representing about three percent of the total stock.

There may be many reasons for a home being empty, and it might be completely unrelated to an investor trying to exploit the tax system for personal gain. The property might be left vacant because the owner is intending to sell soon and a vacant possession might be more valuable than a tenanted one. The home might be part of a deceased estate. It may be rented out for part of the year and left vacant for the rest of the time. It might be a holiday home that a family only uses for a month or so during the year. Or it may be owned by someone who is intending to let a family member or friend live there, but in the meantime does not want the problem of having to remove a tenant. There could be any number of reasons for a property lying vacant for an extended period of time. Water usage is the method Murray used to derive his figure. The Australian Bureau of Statistics regularly finds that about 10 percent of properties in the country are vacant on Census night. Again, there are many reasons why this might be the case. So the person I was arguing with has merely taken a single random idea out of thin air and turned it into a primary objection to a policy that has been in place for generations. And he accused me of relying on intuition while insisting that he had evidence.

The Australian Labor Party (ALP) currently has virtually admitted that removing the negative gearing concession for the taxation of income will reduce the amount of housing stock, because it has said it will still allow negative gearing on newly-constructed properties. Party strategists are likely mindful of the rent increases that resulted in the 1990s when an earlier Labor government removed the ability for investors to negatively gear their property costs. At that time, after removing the concession the party quickly put it back in place due to community concerns.

The party has also said that it will reduce the capital gains tax discount, which you can claim for keeping a property for more than one year, from 50 percent to 25 percent. As with the negative gearing policy, for properties owned since before the law change comes into effect the exemption would be grandfathered.

My accountant says that the ALP’s policy will certainly change before or after the election due to pressure from interested parties. He suggests that it is simply too early to say which way the ALP will go on either matter. At present, new housing approvals are down 13 percent on the level they were at the previous year, suggesting that construction of housing is being affected by the current market downturn with less investor interest in new builds, and that as a result there will be a housing shortfall in the medium term that will push up rents.

One thing to keep in mind is that ownership of investment properties in Australia is very widespread. Approximately ten percent of Australians aged 25 and over own at least one investment property, a rate that is much higher than what applies in the US. Australia recently claimed the global mantle for personal wealth, as well, displacing Switzerland. The average Australian is much better-off than the average American.

UPDATE 2 November 2018 8.20am: A subsequent story in the Sydney Morning Herald by journalist Jessica Irvine on negative gearing noted that there are 2.1 million Australians who own at least one investment property, equivalent to 12 percent of the adult population. So my figures in this blogpost were an underestimate.

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