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Government inquiry highlights negative gearing dangers

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Property incentives have created a “significant source of risk” for the economy, according to the Financial System Inquiry.

The inquiry’s interim report, which was released earlier this week, said negative gearing and capital gains tax had encouraged “speculative investment”, particularly in housing.

“Since the Wallis Inquiry [in 1997], higher housing debt has been accompanied by a greater exposure to mortgages by lenders,” the report said.

“The housing market has become a significant source of risk for the financial system and the economy.”

The report also said that favourable tax rules for property had steered more wealth towards housing and produced a less efficient housing market.

“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing,” it said.

“Investors are attracted by the asymmetry in the tax treatment of expenses and capital gains on investor housing.”

Household leverage has increased from a debt equivalent to 0.8 years of gross disposable income in 1997 to 1.5 years of income today, according to the report.

The increased willingness to borrow has partly been driven by a rise in incomes, which in turn has contributed to a relative increase in housing prices since 2000.

“New dwelling construction arguably has not been sufficient to meet population growth over the past decade,” the report said.

“The Australian housing market has a number of long-standing structural features that inhibit supply responsiveness to demand-driven price rises.

“These include regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry.”

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