Despite critics of negative gearing claiming that scrapping the scheme would save the government $5 billion in one year and free up housing, a wealth advisory firm has painted a much bleaker picture of what would happen if the mechanism was removed.
Chan & Naylor, a national accounting and wealth advisory group, this week 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.
The group said 96 per cent of public housing is currently provided by the private investment market, “the majority of which is owned by ‘mum and dad’ owners who enter the property investment market thanks to incentives such as negative gearing to assist them in the early years”.
“Currently, the Australian rental market is controlled by mum and dad investors, not commercial landlords, and as a result the Australian domestic housing market remains akin to a ‘public co-operative utility’ with rental properties available at varying levels of affordability,” Ken Raiss, managing director of Chan & Naylor said.
Mr Raiss argued that if the tax concession is taken out of the equation then the vast majority of stock which us currently owned by those with one property (73 per cent) and two properties (18 per cent) will inevitably be purchased by commercial landlords who will demand higher rental yields on par with their commercial portfolios.
“Like any other public utility, as soon as they enter private and more entrepreneurial hands then prices will go up, and in the case of public housing this could lead to a rental price hike of as much as 50 per cent over time, resulting in the government having to shoulder the weight of providing a much larger percentage of housing for tenants and social dislocation for those unable to receive government housing,” he said.
Mr Raiss contended that negative gearing has been inaccurately portrayed as a “tax rort” rather than a rightful business-loss mechanism available to residential property investors – 70 per cent of whom earn under $80,000 per annum, according to Chan & Naylor.
He said this perception was largely due to first-time investors who buy speculatively and overpay, therefore using negative gearing for “longer than appropriate”.
Mr Raiss said even small-time investors must treat their purchases as a business and be able to recoup their losses.
“Small business owners wouldn’t invest in a new or start-up business if they couldn’t claim their losses, so there is no reason why property investment should be any different,” he said.
Mr Raiss said there needed to be greater collaboration between government and business in order to create “an atmosphere of enterprise”.
“Increasing productivity will enable more Australians to share in the growing property pie and reduce their dependency on government funding.”