Does negative gearing reduce home ownership rates?

There is an ongoing political debate in Australia as to whether to scrap the negative gearing tax break for property investors. The policy allows investors to tax deduct interest on a property investment loan if rental income falls short of interest payable and on the loan writes Sam Green, Advisor at Options Educator, TradersCircle.

The Grattan institute, an independent policy think-tank, jumped into the debate over the weekend, releasing research that showed the current policy heavily favoured the wealthiest Australians; with around half of the tax deductions claimed by the top 10 per cent of Australian income earners.

The report found that negative gearing reduces home ownership rates, as well as encouraging turnover and reducing the security of a renter’s tenure. It called for the scrapping of the negative gearing policy, stating that its removal, as well a suggested change to capital gains tax, could add more than $5bn to the budget bottom line annually. The proposed changes are forecast to reduce house prices by 2 per cent, with minimal impact on rents and new development.

Another report released by The Australia Institute (another independent policy think-tank) this month sought to geographically break down the biggest winners from negative gearing; their report showed that they primarily were wealthy individuals living in Liberal electorates. In fact, the top ten electorates for negative gearing deductions were all Liberal held.

The Australia Institute paper also concludes “that income is still the most important factor in negative gearing. Higher incomes are correlated with higher rates of negative gearing and larger negative gearing deductions.”

For their part, Treasurer Scott Morrison and Prime Minister Malcolm Turnbull have reiterated their defence of the policy, stating that the notion that negative gearing primarily benefits high income earners is a “a complete and utter myth”.

The liberal leaders also state that reducing or removing negative gearing would destroy house prices, by taking up to one third of buyers out of the market. However, this assertion was refuted by the Grattan Institute, which countered that “Every time an investor sells a property to a renter, there is one less rental property, and one less renter. There is no change to the balance between supply and demand”.

The Australian Federal Budget for 2016 will be released next Tuesday, with an analysis by Deloitte Access Economics showing that the deficit is likely to increase due to a drop in taxation revenues. The Deloitte report warns that public debt is in danger of passing a point of no return.

If the budget does show a large increase in the deficit, expect even more public discussion of the tax and spending mix, including more impassioned viewpoints on negative gearing.