Scrapping negative gearing makes no sense

By Staff Reporter

A chorus of business figures have issued dire predictions relating to the scrapping of negative gearing, after it emerged last week that the Reserve Bank of Australia supports a review of the policy.

Property and finance professionals have warned of a flooded housing market and damage to the Australian economy should the federal government choose to scrap or reduce negative gearing incentives.

The responses were triggered by the RBA’s submission to the House of Representatives Standing Committee on Economics’ Inquiry into Home Ownership, in which it expressed support for a review of the tax policy.

“The bank believes that there is a case for reviewing negative gearing, but not in isolation,” the submission read. “Its interaction with other aspects of the tax system should be taken into account.”

The Queensland University of Technology Business School’s David Willis predicted that changes to the policy would lead to a downturn in the domestic property market.

“If capital gain and negative gearing are pared back or cut altogether it may, in the short to medium term, create conditions of a housing glut as investors sell properties they can no longer afford,” Dr Willis said. “This then affects the wider housing market and can create a situation of house price deflation.”

He warned that changing the policy could have negative implications for the broader economy.

“While this may create affordability in some cases, it could also cause a situation where lending significantly slows and the economy slows with it, as banks will be less willing to lend for renovations and purchases given the falling prices.”

Real Estate Institute of Western Australia president David Airey said that focusing on negative gearing was not enough, and that a broad review of the different property taxes across Australian states and territories is needed.

“It is too simplistic just to target negative gearing as an issue for review without looking at the wider housing system and the clumsy patchwork of property taxes across the country,” Mr Airey said.

Mortgage Choice CEO John Flavell also lambasted calls for the scrapping of negative gearing, arguing that property investor confidence and the national economy were inextricably linked.

“At Mortgage Choice, we think negative gearing plays an important role in the property market,” Mr Flavell said.

“The tax benefits associated with negative gearing helps to make property investment more attractive to some Australians and, given that the success and strength of the housing market is critical to the health of the Australian economy, it doesn’t make sense to consider removing any initiatives that help this market.”

Mr Flavell instead called for an increased emphasis on first home buyer initiatives.

“Instead of placing the emphasis on negative gearing and the impact it has on the property market, we should be placing the emphasis on first home buyers and what initiatives or incentives we can introduce to help them.

“It would be great to see first home owners receiving tax concessions similar to those enjoyed by investors, as we believe this would encourage a lot more first buyers into the market.”

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