Yahoo Finance ‘Nuclear bomb’ headed for Aussie property
It’s been panned by investors but remains a beacon of hope for those locked out of the property market – changes to negative gearing have been described as a “nuclear bomb” with the power to trigger an Australian recession.
Aussie Home Loans founder, John Symond said changes to reign in negative gearing could have “astronomical” side-effects.
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He said it’s “such a radical move that could tip the economy over”.
“I am concerned that it would do so much damage — unemployment, higher interest rates — it could tip us into recession.”
However, Shadow Treasurer Chris Bowen described Symond’s claims as “extreme, ridiculous and contradictory”.
Bowen also referenced comments by Deloitte senior economist, Chris Richardson, contending that while reforms to negative gearing will have an impact – it will be “definitely non-nuclear”.
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“It doesn’t matter if they’re good or bad policy, they’re not huge policy,” Richardson said.
“That’s the thing that people keep forgetting. The Australian housing market is $7 trillion where the values or claim of rental properties are $11 billion a year on the tax system. The lever is too tiny.”
Wait – what is negative gearing?
Symond’s alarm is only the latest entry into a policy debate that has engaged and enraged Australians for several years.
Negative gearing is a tax situation where the rental income on an investment property is smaller than the outgoing mortgage repayments and costs. This means the investor has a net loss. However, negative gearing allows the investor to offset that loss against their income tax bill.
Supporters of negative gearing argue higher investment encourages greater construction and a greater number of new dwellings. They also argue restricting negative gearing would force investors to increase rents.
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Those on the other side of the table argue the current negative gearing landscape makes it easier for established property owners to purchase property than first-home buyers and that there is an inherent problem with this.
They also argue negative gearing is tightening supply and subsequently pushing prices up, again raising the bar for first-home buyers.
What does Labor want to change?
The Labor party is heading to an election with negative gearing reform as one of its major policies. The party wants to change the tax policy to limit negative gearing to newly-built dwellings. However, the reform will not affect current investors.
Labor argues this will protect current investors’ interests, while redirecting the flow of investment towards new properties, prompting greater construction and supply.
The Liberal government argues changes to negative gearing will further puncture a slowing property market.
Negative gearing: Who really benefits?
Prime Minister Scott Morrison made headlines in 2016 as then-Treasurer by arguing the majority of negative gearers are nurses, teachers and police, and as such have a low income.
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The debate has simmered along in the years since and bubbled over again this week, with new tax analysis finding 640,000 negative gearers live in Coalition seats, with 570,000 in Labor seats.
Pointing to this, Treasurer Josh Frydenberg last month argued Labor’s policy to rein in negative gearing for new purchases was tantamount to “punching down” on Labor supporters.
“These are not rich people who necessarily negative gear, 58,000 teachers, 41,000 nurses, 20,000 police and emergency personnel,” he told the ABC.
However, a recent report from The Australia Institute argues the exact opposite; 49.8 per cent of the benefit of negative gearing flows towards households with incomes in the top 20 per cent.
And, the policy is simultaneously pushing young Australians out of the market by pushing up housing prices.
“About 70 per cent of the benefit of negative gearing goes to those aged over 40 while just 30 per cent goes to those aged 40 or younger. This represents a double hit for young people,” senior economist Matt Grudnoff explained.
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“They are missing out on the negative gearing tax concession and they’re being priced out of the housing market.”
The report also found that when it comes to the size of the negative gearing benefit by electorate, eight of the top 10 electorates are Liberal held.
The national debate comes as fears over the Australian property landscape grow.
According to recent finder.com.au analysis, apartment owners across the country can expect to see their properties plummet 8 per cent in value by the end of 2019, while Macquarie Bank this morning warned the property market is headed for its worst downturn in 40 years.
