Will the Government have the guts to Change Negative Gearing Rules?

model of a house and key ring
Reddit

We’ve been writing on the topic of family wealth this week. It’s going to be an area of growing interest as society ages and thoughts turn from wealth creation to wealth preservation through the generations. But we’re not going to write about that today; there’s plenty of other stuff going on. Besides, you’ll be hearing more on the topic later today from Vern Gowdie, our family wealth expert. So keep an eye out for that.

The ageing of society is already starting to worry the government. The front page of today’s Financial Review says that Treasurer Joe Hockey is softening retirees up for pension cuts in the upcoming budget. Citing IMF research released earlier this week, Hockey says that spending on the pension is set to rise 70% in the coming decade if entitlements remain the same.

The message? Entitlements won’t remain the same. There’s a good chance that means testing will change, and it’s likely the assets test will be the focus. According to Grattan Institute director John Daley, 80% of people over 65 with $1 million in assets, collect the pension.

That’s because the family home is exempt from the assets test. After the budget, it probably won’t be. Changes could include only exempting the value of the family home up to the median house price threshold.

Such a change is likely to increase the trend towards downsizing, as retirees look to unlock the equity in their homes for living expenses. You’ll read more about this demographic trend from Nick Hubble in coming weeks.

The government could also make a serious dent in the budget deficit by changing negative gearing rules on property, a policy that costs billions for no discernable benefit. It’s a discussion that’s on the table apparently, and SBS reported on it earlier this week:

In 1985, when the Hawke government made changes to the scheme, the then-treasurer Paul Keating described negative gearing as a way for high-income earners to "swap flats on Bondi Beach which were built 40 years ago”.

And it remains true. In 2013, only about eight per cent of the money funding the scheme went towards new dwellings, with the remainder for established homes and apartments.

And today, the AFR picks up the story, saying departmental sources have confirmed the Treasury has done work for the budget on limiting negative gearing to new housing construction only. It remains to be seen whether the government has the guts to make the changes, but having the conversation is a start.

The benefits to the economy and society as a whole would be many. Apply negative gearing to the construction of new dwellings only and you’ll get an ongoing boost to the construction sector, which means more future housing supply. Along with removing the speculative element from the market, this will take the heat out of house prices and ease the pressure currently on the RBA to raise rates. The dollar would fall and take the pressure off our tradable industries.

More supply and lower prices give renters the chance to buy at reasonable prices. This dynamic destroys the scare campaign by the negative gearing advocates that rents will explode and leave people on the streets.

But not according to Housing Industry Australia boss Harley Dale. In the AFR he warned that:

…tinkering with the system would have a “massive negative impact on investor sentiment”. He said rental supply wouldn’t increase if investors were not confident.’

Bollocks. Is rental supply increasing because of negative gearing? No, of course it isn’t. And yes changes to negative gearing would damage investor sentiment, but so what? All this bullish investor sentiment is doing right now is pushing house prices up across the board and creating little new supply.

According to economist Saul Eslake, over 90% of negatively geared funds goes towards existing property. ‘Nuff said.

The fact that the government is seriously sniffing around negative gearing, and changing asset testing rules for pensioners, suggests property is nearing a top. At the height of China’s credit boom, when miners were rolling in it, the government slapped a super profits tax on the industry. They picked the top nearly precisely.

This has a similar vibe. Property is the magic goose in Australia and the government wants to start taking some golden eggs. Let’s just hope they don’t break its neck instead.

Regards,

Greg Canavan+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
Reddit

Leave a Reply

9 Comments on "Will the Government have the guts to Change Negative Gearing Rules?"

Notify of
avatar
Sort by:   newest | oldest | most voted
smallcap
Guest

Stick to predicting the price of gold Greg, you were good at that. Politically it would suicide. People would ‘feel’ poorer – yes that is important for spending. Advertisers would lose a lot of revenue – so how would the press react? Erm not think State Government relies heavily on stamp duty? We have just been through a real fall in house prices (and if not in Syd or Melb some are still under water). Ramifications of sudden falls in house prices in 2008 have any memories for you. Move on mate please, does you no credit.

David
Guest
Great writing Greg keep up the nice work one of few sites that tell the truth the whole truth and nothing but the truth.The thing is the people that have been milking the system for years don’t want change.Well I got news for them times are a changing and its only a matter of time.Get used to it u cant flip houses for ever and expect it to go on we are way over the top on house prices now and when the drop comes and its not a if but when its going to sting.But for the future of… Read more »
Dasha
Guest
Quite obviously Smallcap you are heavily negatively geared. The baby boomers might get poorer, but younGer people will be richer, what’s wrong with that. They will buy a home at a reasonable cost, have some money left over to spend on other things, move out of mum and dad’s house, start spending money on renovations, furniture, etc. the economy will be much better without it. The younger generation is sick of subsidising the baby boomers with their tax breaks. Politically it wouldn’t be suicide because the voting demographic is changing and parties are slowly realising they have to tackle the… Read more »
David Collett
Guest
It’s good to see you understand the importance of removing negative gearing Greg. I also think challenging Tony Abbott to see if he has the balls to make the move has merit too. I sent a tweet earlier in the week to him asking if he had enough hair on his chest to do it :) @smallcap Politically, removing negative gearing can be whatever you want it to be. If you’re stupid in the way you approach making the change then vested interests will probably get the better of you. But if you are smart about it and make the… Read more »
Charles Ponzi
Guest

@smallcap Many readers like myself visit this website specifically to read articles like this one on negative gearing and the high cost of housing in Australia. Keep writing Greg.

Indomitus
Guest
Good article. Well said. Negative gearing is just a huge transfer of wealth. That money doesn’t come from nowhere, it comes from people’s taxes. Tax payers that don’t have enough income/equity are propping up wealthier investors so the investors can price the rest of us out of the market. And it’s all going into existing housing. The idea is ludicrous and for any legitimate government, who supposedly has the people’s best interests as a first priority, to let it continue is incompetent at best, criminal at worst. Shelter is a basic necessity and is required by all Australians. Owning your… Read more »
Gann
Guest

Limiting negative gearing to new construction is a start but it could actually cause an INCREASE in prices in some segments, With new construction favored, investors would flock to new apartment projects driving up the cost of land with existing apartments falling in value. Besides land owners Other winners would be builders and tradesmen

ram
Guest

“…magic goose in Australia and the government wants to start taking some golden eggs. Let’s just hope they don’t break its neck instead.”

Dead on! They will break its neck just like they did to high tech manufacturing with the GST. If there is money to be stolen, the Australian government will steal it

Anthony
Guest

If they are going to restrict negative gearing to new builds only, they better have the appropriate protections in place for inner city heritage buildings, as the pressure from developers to demolish existing inner city buildings to create new ones for investors will be immense. Not everyone wants to invest in the burbs.

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au