I want a nest egg. You want a nest egg. Everyone wants a retirement nest egg. But how do our leaders facilitate this without distorting residential property markets which affect other market players?
Negative gearing allows property investors to attain tax deductions from the outgoing expenses that come from holding a rental property (or properties) as an investment when they are more then the rent they are earning. This includes: interest on the loan, the cost of repairs, maintenance and improvements, renovations, council rates, water rates, insurance, fire levy, stamp duty and real estate transaction costs. However, if you buy the property as your place of residence you do not get to claim these tax deductions, although you do get to claim a capital gain tax exemption.
Researchers from the Grattan Institute have found “that certainly there are some middle income earners that negatively gear” but “when you look at the distribution of tax benefits they overwhelmingly go to high-income earners”. About 50% of the benefits from negative gearing go towards the top 10% of income earners.
Australian Prime Minister Malcolm Turnbull once agreed with this opinion. He described negative gearing as using tax policy to “distort economic behaviour…skewing national investment away from wealth-creating pursuits, towards housing, [creating] a property bubble” in a 2005 tax policy paper. More recently, Turnbull has changed his opinion stating that "scrapping negative gearing will cause rents to rise” and will curb investors’ “demand for property”.
Particularly in Melbourne, the PM’s stance that scrapping negative gearing will increase rents is unjustified. There is no evidence of this. In 1985-87 when negative gearing was abolished, rent decreased in Melbourne and every other city in Australia (other than Sydney and Perth and thus negative gearing cannot be deemed the cause).
His comment is further unfounded due to the current and amplifying glut of city and inner city apartments in Melbourne. In 2016 and 2017 there is expected to be “about 21,000 to 22,000 apartments” built in Sydney and Melbourne, further adding to the market. The law of supply and demand means that this will, in fact, keep rent prices low. This, paired with an extremely low interest rate predicted to drop to a “record low” of 1.75% in August 2016, means that 2016 is an ideal time to realign this market distortion.
What would help to keep rent prices affordable is using tax policy to encourage Australians to rent out empty properties. By measuring water usage, researchers have found that there are currently “some 82,724 properties, or 4.8 per cent of the city's total housing stock" that appear to be unused in Melbourne.
First home buyers in Melbourne and Sydney can only hope for a dip in property demand (and hopefully a realignment of the market) after the unsustainable growth in house prices averaging 7.3% a year since 1999. According to the 2015 12th Annual Demographia International Housing Affordability Survey, Australia has 2 of the top 10 least affordable housing markets in the world. We want Australia to be a world leader, but not in this measurement. Sydney sits at number 2 globally and Melbourne equal 4th with Auckland and San Jose, USA. The other 6 are Hong Kong, PRC (1st), Vancouver (3rd), San Francisco (7th), London (8th), Los Angeles and San Diego, USA (shared 9th).
Negative gearing needs to be wound back, used for new properties (to encourage supply) but with a limit placed on the amount of properties that can be negatively geared per family.
The flow on effects and negative ramifications that would come from restricting negative gearing to only the banking sector have also been mitigated. In June 2015 financial services regulator, the Australian Prudential Regulation Authority (APRA), enforced policy to significantly change banks’ lending policies to investors, thus cooling the market. They released a temporary directive to the big four banks and Macquarie requiring them to “increase the amount of capital they hold against their residential mortgage exposures”, causing banks to reduce the amount of mortgages they can supply. However, Westpac has now reduced these higher mortgage deposit requirements for investors.
The government needs to stop incentivizing investment in property, which artificially inflates housing markets at the expense of other buyers. Instead, it needs to incentivize the investment of startups and long term infrastructure funding. The coalition has recognised this and has made a start supporting angel investors, startups and entrepreneurs in an attempt to adopt an Israeli style support network for entrepreneurs. This incentivizes real growth in the economy, rather than market distortions for the gain of just one section of society. Initiatives include “a $200,000 cash injection to promote fintechs on the global stage” and a continuation of the innovation agenda announced in 2015. This involves the government contributing "$11 million to establish startup landing pads” in Tel Aviv, San Francisco, Shanghai and Berlin. According to the budget, these landing pads will “support emerging Australian companies in global innovation hotspots”.
There are other investment possibilities that have not been incentivized for individuals: long-term infrastructure, science, research, and very necessary communication infrastructure such as a higher quality National Broadband Network (NBN). In response to the dire need for investment in long-term bankable infrastructure projects, multinational organisations have taken up the call as they recognise the long-term, negative ramifications of a shortage of adequate infrastructure in Australia’s major cities.
The G20 has come to the forefront to address this need. Sydney has put up its hand to house the G20 Global Investment Hub (GIH). This platform has a global outlook and seeks to facilitate “knowledge sharing, highlighting reform opportunities and connecting the public and private sectors” as well as “lowering barriers to investment, increasing the availability of investment ready projects, helping match potential investors with projects and improving policy delivery.”
It would be incredibly helpful for superannuation funds, managed funds and personal investors to have the ability to jointly invest in hugely needed infrastructure projects checked by the GIH as being a high-quality investment which would help to develop economies without compromising housing affordability. The GIH is planning to eventually provide “a project pipeline to showcase investment ready projects to multilateral banks and private investors.”
The World Economic Forum’s Infrastructure Investment Blueprint stresses the need for investors to have ‘a clear role’ in funding projects either solely or as part of public-private partnerships (PPPs). It recommends tax policy changes with “lower expenses and cost of capital for investors” for long-term infrastructure. Thus, allowing long-term investors the ability and information to invest in needed infrastructure boosts the growth potential of economies while still obtaining returns in a lower risk market compared to other vehicles as well as furthering the public-private model.
When it comes to building a retirement nest egg for the future, property is still regarded as one of the safest long-term investments – no incentive is needed. The funds from Australian ‘mum and dad’ investors could be more strategically incentivized in order to enable growth, jobs and efficiency.
Originally posted in 'Insights' by Young Australians in International Affairs by Cassandra Oaten, International Trade and Economy Fellow.
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Image credit: OTA Photos (Flickr: Creative Commons)
