Negative gearing encourages “speculative investment” in property and poses a “systemic risk” to the economy, an inquiry has heard.
The final report of the Financial System Inquiry (FSI) – which aimed to establish a direction for the future of Australia’s financial system and layout a ‘blueprint’ for the financial system over the next decade – said that negative gearing and capital gains tax “distort the allocation of funding and risk in the economy”.
“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment,” the report said.
“Since the Wallis Inquiry [in 1997], higher housing debt has been accompanied by lenders having a greater exposure to mortgages. Housing is a potential source of systemic risk for the financial system and the economy.”
Glen Coutinho, director of RT Edgar Real Estate Hawthorn, said removing negative gearing would not make a significant difference as it causes only minimal distortion to the housing market.
“It will take the conservatives out – there are certainly some people that won’t buy real estate, but not many,” he told Smart Property Investment's sister publication Real Estate Business. “A percentage of people will look at other investments. Traditional investors – especially older investors – like bricks and mortar and prefer it to the share market.”
Piers van Hamburg, director of McGrath on Sydney's lower north shore, said negative gearing is not having the same impact on the market as it has in previous years.
“I think negative gearing becomes more imperative when you’ve got rates around 8 per cent, because there’s a lot more to negatively gear,” he told Real Estate Business. “At the moment, with rates between 4.5 and 5 per cent and returns between 4 and 4.5 per cent, there’s nothing to negatively gear.”
Prominent economist Shane Oliver recently said that negative gearing is one of three “scapegoats” being used to explain rising house prices, alongside foreign investment and SMSF buying.
“Negative gearing is more contentious, but it’s likely that curtailing access to it, when stamp duty remains very high, will have a negative impact on the supply of property, to the extent that it will have the effect of reducing the after-tax return to property investment,” he said.
“Restricting negative gearing for property would also distort the investment market, as it would still be available for other investments.”
In recent months, negative gearing has increasingly been on the political agenda, with many industry stakeholders and commentators having their say about whether the system helps or hinders the overall national economy and property market.
In November, ANZ CEO Phil Chronican said the tax concession was the key driver behind Australia's "irrational obsession" with property. This came after leading economist Saul Eslake urged the government to grandfather negative gearing to cool the overheated investor lending market.
Speaking at the Finsia annual conference, Mr Eslake said a “simple answer” to the boom in investor lending would be for the government to scrap negative gearing without impacting those who already use it.
Other commentators, however, have come out in support of the scheme.
Chan & Naylor, a national accounting and wealth advisory group, recently said that removing negative gearing would cause market consolidation and rental increases of 50 per cent plus – which in turn would lead to wider economic uncertainty and social dislocation.
In response to the ongoing debate, Smart Property Investment posed the question to real-life investors on Facebook, who overwhelmingly supported maintaining the current system.