7 June 2015 - Removing taxation benefits for property investors would reduce demand for new homes

The Australian Greens push to remove negative gearing would make housing affordability worse, economists say.

Discouraging investment in property would reduce supply of new housing and increase rents.

“There’s no doubt if an existing benefit is taken away then landlords would logically recover that by putting up rents and that would be particularly so in markets where there are tight vacancy rates,” Domain Group senior economist Andrew Wilson says.

“Anything that changes the supply would only impact tenants. I think that’s working against the people that the proponents of getting rid of it are trying to help.

“The issue with first home buyers particularly isn’t so much the repayments, because we have the lowest interest rates since the mid-60s, it’s saving the deposit. So if they’re forced to pay more in rent it just means it’s going to take longer to save a deposit.”

AMP Capital’s chief economist, Shane Oliver, says a lot of the new housing supply coming to market is rental property, bought by investors. Removing taxation benefits for property investors would reduce demand for new homes which would lead to less being built.

“If it’s overvalued housing we want to address then we need to really think about whether it is negative gearing or something else and I think it’s the lack of supply.”

He says local and state governments should make it easier to develop new homes by releasing more land and loosening development restrictions.

Economists also question differentiating property investments from other forms of investment.

“It’s a stated principle that when you undertake an investment you can claim costs and interest is just another cost. It would create an inconsistency,” Mr Oliver said.

Negative gearing is now used by middle income earners as well as high income earners in an effort to reduce their tax bill, signalling that income tax rates are too high, economists say.

“No one is talking about the top marginal tax rate which is number eight in the world,” NAB’s chief economist, Alan Oster says. “A lot of the focus is because people don’t want to pay 50¢ in the dollar, so they negative gear and pay just 25¢.

“If you have [income tax] at more neutral levels there wouldn’t be such an incentive for people to game the system.”

Mr Oster warns that if prices are successfully brought down it could lead to high levels of unemployment.

Read Online