An argument for negative gearing

In Negative gearing is not so negative Michael Pascoe argues that negative gearing is not necessarily a bad thing. As he writes, and this is something I've thought for a long time, the issue with housing affordability isn't the presence of investors but the lack of supply. On the positive side, the additional investors attracted by negative gearing increase the supply of rental accommodation in the market, this lowering rental costs.

More fundamentally, the article homed in on the negative gearing scapegoat because it only addressed the housing affordability question from one side of the equation – demand – and did not mention the other side – supply. Fixing the supply problem is a better way of solving the housing affordability problem than trying to arbitrarily restrict broad taxation principles for one particular sub-set of an asset class.

...

Increasing supply, given our population growth, is a much better way of equitably dealing with housing affordability.

Saul Eslake on tax reform

Prior to the 2011 Tax Summit Saul Eslake made an interesting speech on tax reform. The transcript is online at Australia's Tax Reform Challenge. While I don't necessarily agree with everything he says, he has some very compelling arguments. He may even have changed my mind on negative gearing. Well worth a read.

Should be abolish negative gearing?

I'm still not convinced, but in It’s time to abolish negative gearing Philip Soos argues that we should.

Housing affordability

Jessica Irvine in Housing outlook remains grim for the forgotten people notes that buying their first home is still impossible for a third of households.

A lot has changed since the global financial crisis hit Australian shores in late 2008. For the third of households who own property outright, the news has been good - homes have largely retained their value. For the third of households paying off a home loan, the news has been similarly positive - mortgage interest payments have fallen dramatically.

But for the forgotten third - renters or those looking to buy - the outlook remains grim. Once the mortgage belt's demand for lower interest rates was satisfied, concern about high prices for first-time buyers evaporated. House prices may have plateaued, but a new generation of young peoplestill cannot, and may never, afford to buy their own home.

Tim Williams, the co-author of a report on housing affordability, released this week by the McKell Institute, says the proportion of those aged 35 or below who cannot access home ownership - they live at home or rent - now stands at 66 per cent, compared with about one-third for the population at large.

Jessica goes on to write:

From an outsider's perspective, Williams says the property market is fundamentally, and uniquely, distorted. ''I remember my head reeling when I discovered how generous negative gearing was. There's nothing like it in the known world in terms of its generosity and in terms of its middle-class welfare.''

By adding to demand for housing - people's ability and willingness to pay for housing - negative gearing had inflated house prices for decades.

''I just think it's an astonishing gift to the wealthy and it has perverse effects on the housing market. You are squeezing young people out of home ownership while some people have two, three or four units - the incentives are just wrong.''

All this distortion has resulted in an astonishing fact: 22 per cent of people now own 55 per cent of the homes.

Williams is similarly shocked by the breakdown in the supply of new housing in the big cities, and Sydney, in particular. A complete lack of trust in the planning system in NSW has forged an unholy alliance between environmentalists and wealthy homeowners who gain from higher house prices by restricting the supply of new housing, he says.

Taken together, governments have for decades stimulated demand for housing, while failing to increase supply; a simple equation that has driven home prices up as a multiple of household incomes.

The solution?

Tax breaks that encourage excessive investment in housing,such as negative gearing and capital gains tax exemptions on the family home, need to be curbed or phased out.

Transaction taxes on property, that is stamp duties, which discourage people moving to more suitable accommodation, need to be abolished. Higher density development along transport lines and a focus on developing multi-centric cities should be encouraged.

The cost of infrastructure that will benefit future generations should not be passed on to new home builders through developer levies.

Michael Pascoe on housing affordability

Michael Pascoe has some interesting things to say in Housing affordability: the summit we really need. I'm not sure I agree with everything he says, particularly in regards to negative gearing (disclaimer, I don't have an investment property or any negative gearing). I'm also not sure I support a land tax. Still he has a point.

Edit 12/10: Michael Janda discusses negative gearing and the tax summit in Let's talk about tax.

Edit 19/10: Jessica Irvine in The true cost of NIMBYism discusses modelling by economists from the Reserve Bank that looks at some of the causes of the housing shortage.

Through a combination of empirical research and new economic modelling, the authors Mariano Kulish, Anthony Richards and Christian Gillitzer highlight some factors that contribute to Australians living in more expensive, smaller and lower density housing than we would if the housing market was not constrained by a number of structural factors, including high transport costs, restrictions on density and costs imposed on new housing supply.

Edit 22:10: In Urban Densities: Keep it Real Bob Carr discusses Jessica Irvine's above piece and notes that although it's correct, it fails to address two recent developments that will lower housing density in NSW (with the implication that the increased sprawl will decrease affordability):

One, Barry O’Farrell in April this year gave control over density and zoning decisions to local government. As a result, this will see more high and medium density developments rejected.

and

Two, the Land and Environment Court has overruled attempts by the previous Labor government to have high density development along the North Shore rail link in Ku-ring-gai shire, boosting densities near the railway station and along a major transport artery. This decision means 10,000 more future dwellings will have to be delivered on Sydney’s urban fringe.

He concludes with:

Jessica finishes her piece saying “Interestingly, the … researchers found evidence that Sydney’s population density has increased in recent years.” Yes, it is interesting. It was also the product of 16 years of sound planning policy. Sydney has the highest population density of any Australian capital. Over the past decade only 21 percent of new homes were built in greenfield areas, compared to over 50 percent in other Australian capitals. Melbourne is going for growth on the fringe. Cities either grow up or out. Stop them growing up and they sure as hell will grow out.