Don’t Play With Fire: Why PIPA Supports Negative Gearing

Comment from Ben Kingsley, Chairman, Property Investment Professionals of Australia

The Property Investment Professionals of Australia (PIPA) believes that the Australian Labor Party’s (ALP’s) proposed policy changes to negative gearing are hinged on insufficient economic modelling and incorrect assumptions.

Moreover, the association believes that negative gearing has an important role to play in supporting Australian housing, Australian households and the broader economy.

Some of the key reasons as to why PIPA supports negative gearing and where it sees major concerns with the policy proposed by the ALP are:

The changes will hit average Australians – property investment plays an important role in supporting Australians in their pursuit to be self-sufficient retirees and reduce the burden on the public purse to support an ageing population. Property investment is typically the domain of significantly more ‘mum and dad’ investors than wealthy investors. ATO data for FY13/14 shows more households earning between $60,000-$150,000 claim net rent than those earning more than $150,000.

…and will hit hard – Residential real estate represents more than half of Australia’s household wealth (52%) and accounts for $6.5 trillion.* Tinkering with housing policy, without appropriate and extensive due diligence, could seriously impact the wealth of all Australians and negatively impact greatly on market confidence and consumer sentiment.

Labor’s proposed changes will slow the market – With the ALP proposing a removal of the Capital Gains Tax concession as well, it’s likely fewer investors will buy and sell property. This will have a significant impact on local and state government revenues, including stamp duty, land tax and council rates. Significant reductions in these revenues could force the federal government of the day to raise GST for all Australians to cover the big shortfalls in these revenues.

The ALP’s overall modelling is questionable – PIPA rejects the Labor Party’s claims that $32 billion dollars in net revenue will be saved over 10 years via their proposed changes.  Such modelling does not hold up to the most current ATO data available and doesn’t take into account recent reductions in interest rates, which make negative gearing benefits significantly less than forecast.

The proposed changes won’t solve affordability – The proposed changes will see rents rise, as investors look to recover some of the cashflow losses the policy will have.  Interestingly, these rental increases will reduce the so-claimed ‘tax burden’ on other Australians as claimed by Labor and could result in a budget black hole in relation to all their spending promises in the lead up to the election.

The proposed changes won’t support supply – Labor’s proposed removal of negative gearing on established housing is a poorly informed policy that could drive property price reductions and stifle new property development rather than encourage it. ‘New property’ isn’t new for long. If investors know they won’t be able to resell their new properties, they won’t buy them and therefore developers will not build them.

Negative gearing supports the provision of housing– Negative gearing removes pressure on the government to provide social housing. Around 3 million* rental properties are rented through private investors across Australia. Since June 1985, public sector completions have averaged just 4.9% of all dwelling completions and in 2015 just 1.6% of all dwelling completions were from the public sector. If Labor’s changes are implemented, state governments will need to find significant funding to cover public housing, as investors look to alternative options away from property.

We need a healthy property market – A downturn in construction and overall activity within the housing sector will have significant impact on GDP, direct and indirect employment. Housing Industry Australia (HIA) research shows that one in four jobs is related to the property industry in Australia. Given the slowing state of the Australian economy right now, poorly thought-out changes to negative gearing will be catastrophic to jobs and economic growth.

 

*Source: CoreLogic RP Data