Negative gearing reform ‘essential’ to improve housing affordability: Saul Eslake

Scaling back negative gearing or capital gains tax concessions for property investment is “essential” to improve housing affordability for first home buyers, independent economist Saul Eslake has argued.

While applauding some of the housing affordability measures outlined by Treasurer Scott Morrison in his speech to the Australian Housing and Urban Research Institute (AHURI) this morning, Mr Eslake said cutting back negative gearing tax breaks was the number one solution to lifting home ownership rates amongst younger Australians.

“First of all, by reducing the competition which would-be first home buyers face from others who get their interest bill subsidised or who are in otherwise advantaged by the tax system, particularly investors,” he told the ABC’s RN Breakfast program.

Mr Morrison used his speech to rule out changes to negative gearing, which allows investors to deduct interest and other costs related to their properties against their other income for income tax purposes when those costs exceed their rental revenue.

The Treasurer argued such changes would push up rents if investors pulled out of the market, and could lead to an economic decline if property prices fell sharply.

Property groups argue negative gearing is primarily the domain of the middle class, but the data do not support that.
He also argued that it is mainly small-scale investors on moderate incomes that utilise the negative gearing tax deductions.

However, Mr Eslake said that was a major inconsistency in the Treasurer’s arguments in favour of retaining negative gearing unchanged.

“There’s a certain irony in the Treasurer on the one hand saying negative gearing is OK because lots of nurses, teachers and police do it, but in the very same speech bemoaning the fact that nurses and teachers in particular are unable to buy houses in the communities which they serve,” he said.

Increase in housing supply also needed

Mr Eslake said limiting negative gearing and/or reducing the capital gains tax discount is key to improving housing affordability.

“I believe they are an essential part of making housing more affordable for people who don’t already own at least one property,” he said.

“They’re not a magic bullet, they need to be accompanied by other measures which will boost supply.”

Forget affordability, Michael Janda asks why the hell anyone in Gen Y would want to buy a home right now.
While critical of the Treasurer’s continued refusal to consider curtailing negative gearing, Mr Eslake acknowledged some positives out of his speech.

“Some of the things Mr Morrison is proposing in relation, for example, to the bond aggregator based on the UK model of facilitating the raising of debt by not-for-profit housing providers in order to provide more affordable rental housing is an important measure to boost supply,” he opined.

Mr Eslake added that state and local government planning changes to encourage development, and various proposals to encourage older people to downsize to free-up the supply of family-sized houses, would also increase the supply of housing and put downward pressure on property prices.

Eslake attacks super bad idea

Responding to reports in News Limited papers that the Government is still considering some form of scheme to allow first home buyers to divert their superannuation contributions to a housing deposit, Mr Eslake said it was a bad idea on multiple fronts.

“The history of the last 50 years shows that anything which allows people to spend more buying a home than they otherwise would … ultimately results not in more people owning homes but in homes becoming more expensive,” he said.

“That is, the benefits accrue primarily to those who already own homes, rather than those who don’t but would like to.”

Allowing superannuation to be used for home deposits would facilitate a great intergenerational theft, argues Michael Janda.
Mr Eslake recently wrote a report highlighting how an increasing proportion of retirees were using their superannuation savings to finish paying off their home loans.

However, he said that allowing people to access super to put towards housing earlier in their life would not alleviate that situation and may even leave people with less money to clear their mortgage debts at retirement.

“It will also of course mean that those people save less through superannuation over their working lives and a result, because of the impact of compound interest, will end up poorer in retirement than they otherwise would have been,” he added.