overpopulation and land prices

At first glance The Australian Greens’ announcement that they would abolish the negative gearing ₁  tax break, in a bid to increase government revenue through increased taxation and improve homelessness and housing affordability looks like the right move. I have, however a few questions about this.

Firstly it must be pointed out that the Australian Greens advocate that the new tax regime be “grandfathered” so that current negatively geared investors could continue to be so, but that no new investors would be entitled to this. Two sets of tax rules would apply side by side.

I wonder if borrowing to buy a property would be as attractive to a potential investor if s/he could not negatively gear. Presumably, The Greens do not advocate NO tax deduction on an income-generating investment but just to the point where it goes into the red.

I see from the policy document that their ruling would apply to all asset classes. At least here is some consistency.

Negative Gearing applies to non-property investments too

Negative gearing is usually only discussed in the context of property, but of course it applies to other investments too. At present one can borrow to buy shares, which will generate an income since they pay dividends. These dividends are subject to income taxation, in many cases offset by company tax already paid, in the form of imputation credits to the investor. Any shortfall in the income from the shares compared with the interest on the loan is tax deductible. With The Greens’ policy presumably this would only work up to the point that the investor is not going into the red.
One needs to look at why people borrow to invest in any asset. The sensible reason to do this is that the investor believes that the investment will rise in value, such that equity in the asset increases and the loan starts to look small by comparison. The investor can profit in two main ways:

1. With housing, as the value rises, the rent will also increase. Eventually the investor who was negatively geared could become “positively geared” and hence will pay tax to the government.

2. The investor who sees that s/he has made a paper profit can realise this gain, pay back the bank and pocket the profit minus Capital Gains Tax.

I cannot see that abolishing negative gearing will free up housing for non-investor home buyers nor that the tax gains for the government will be as significant as the Australian Greens believe. The abolishing of negative gearing would affect Australian investors, but it would not affect foreign investors who have borrowed from elsewhere. How would that be addressed?

Greens proposal fails to address land-costs – the biggest part of housing unaffordability

The Australian Greens advocate the use of prefabricated houses as a part solution to the terrible problem of homelessness in Australia. I don’t see anything in the document about the land required to put the prefab house on. Land-costs are the major component of housing in cities and these costs are more marked in areas which would be considered to be in a “good position.” The actual house is a relatively minor thing. If people had their own land, probably most would manage to erect some sort of shelter for themselves!

The Australian Greens, in deciding that “negative gearing” is to blame for Australia’s housing woes (and the complete evaporation of “the Australian dream”) fail to address the demand factor which is fundamental to the issue of unaffordable housing.

Where do the demands for Australia’s housing come from?

1. Australians as they reach adulthood tend to need housing apart from their parents . Only about half as many people die in Australia as are born here in any one year so there are roughly only half the number of houses available from that source as there are young Australian people looking for them. Thus there is a built-in shortfall because of our demography.

2. In addition to this, with high immigration, there are likely to be more migrants invited to Australia as business migrants, as skilled workers, students or for family reunion, than there are young Australians looking for their first home.

Penalised Australians would retreat and foreign investors advance

These two groups compete in the same housing market. If Australian would-be investors retreat from the housing investment market because the advantage of negative gearing is not there, I think as long as the total demand for housing does not slump then non-Australian investors will fill the gap left by locals and compete with local home-seekers. With large numbers of people needing housing and a short-fall in supply leading to very high purchase and rental prices, home-seekers and would-be renters will “fall through the cracks.”

Scott Ludlam says that 7,000 houses “for the homeless” will be supplied by 2020. That’s great, but people need housing now. There are 105,000 homeless people on any one night in Australia, according to Salvation Army figures and according to “Kids under cover”. Family breakdown is blamed for a lot of this but if housing were abundant, as it should be, a family breakdown would not result necessarily in homelessness.

Something needs to be done much more urgently about this problem, one which used to be practically unknown in Australia. We all, including The Greens, think we have a silver bullet for this problem but it seems clear that the demand side of the equation still needs to be lightened. This can be addressed easily and quickly at little or no cost. We should not be bringing in large numbers of skilled immigrants to compete against local young people for both housing and jobs. In maintaining very high immigration we are doing our young people a terrible disservice. Surely they deserve better than this?

NOTES

1. ↑  "Negative gearing is a form of financial leverage where an investor borrows money to invest and the gross income generated by the investment is less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments)." Source: en.wikipedia.org/wiki/Negative_gearing