Negative gearing fills a crucial gap in housing market

After several of years of stagnation and pessimism in the housing sector. 2014 has begun with news that important indicators. including housing finance. building approvals and new home sales, are on the rise. These numbers are

important for our economy if we are to rely on housing activity to offset a good portion of the contraction in mining investment But instead of what should be the catalyst for optimism from what is an undeniably good news story, we have seen a deluge of negativity and finger pointing.

Why? Because after years on the sidelines investors are now coming back into the market and this has reportedly been at the expense of the first home buyer.

Which then leads to the conclusion that negative gearing is at the core of the affordability problem . Much of the commentary around negative gearing appears based on the presumption that it is the exploitation of a loophole by investors in residential property, when of course, it applies to an entire range of asset classes. Negatively geared investments contains risk and will only provide a benefit to an investor when the accumulated capital gains (after-tax) over the holding period outweigh the cash flow losses incurred during the holding period. If this is not the case then the investor is left with losses. Added to this, property investment is relatively illiquid with high transaction costs that at about 15 per cent are well above those of virtually all other investments.

It is also important to recognise that property investment is not the domain of the wealthy. According to the Australian Taxation Office. 77 per cent of taxpayers with property rental income have a taxable income of less than $80,000.

The taxation revenue forgone from negative gearing is around $2 billion annually. Contrast this with $5.2 billion spent by the Commonwealth under the Social Housing Initiative to bring 19.700 homes to the market A significant addition to the public housing stock. but the equivalent of about I per cent of the private rental market If changes to the taxation treatment of investment in housing did see investors exit the market, will governments have the appetite, or means, to ml this gap? Would property prices drop across the board? It is true that many first home buyers are struggling to get into the market, particularly if they live and work in a market such as Sydney or Perth. And the November finance figures do show that first home buyer lending was at record low levels as a proportion of total finance, having fallen from the previous quarter by 4.3 per cent, while loans to investors increased by 1.5 per cent But the actual number of first-home buyers actually increased during 2013, rising from 18,355 loans in the March 2013 quarter. to 20.217 in November. This represents an improvement of10.1 per cent, albeit from a low base. Nonetheless, the lowest Quarter of first home buyers on record – excluding the early I990s recession – in March 2013. predates the latest surge in investor activity, suggesting that there are other factors at play on the supply side. and tweaking investment tax laws will only mask the real problem at the risk of creating others. A good place to start is with reducing the excessive and inefficient taxes on new housing, and untying the red and green tape that add further costs to building. At the same time, we need to reverse years of anti-development mentality that have created road blocks at every tum.

While everybody has a story about a friend or family member that can’t buy their first home. too many people also oppose residential development in their suburb.

Investors and first home buyers are looking for affordable property around transport corridors that gives access to places of employment The problem for first-home buyers is the nation’s failure to keep up with demand for these properties.

More accurately, there has been a decade of neglect and an absence of political will to address housing supply, which has delivered an inevitable concoction of renewed demand amid a contraction in relative supply. Increased investor activity is good news for housing activity market confidence and keeping a lid on rents. As a by product government revenue benefits as well.

If governments cleared the path to allow industry to build the dwellings that the community is demanding. then perhaps opinions about negative gearing, or first home buyers competing against investors, would be redundant.