Axing negative gearing to hit young investors
Abolishing negative gearing would bring huge changes to the housing market, including price falls and a 30 per cent collapse in the supply of rental properties, but would leave three quarters of the population better off in the long term with lower mortgage costs, a Melbourne University study has found.
But the study showed that the 17 per cent of the Australian population with property investments — 70 per cent of which are negatively geared — would be worse off, with many quitting their holdings.
Housing investment by the higher earning 40 per cent of the population would drop by more than 50 per cent.
Property investors aged under 45 years put the greatest reliance on negative gearing and would be the worst hit.
On average, they would be 8 per cent worse off. “The young landlords are worse off because most of them rely on borrowings and incur rental loss during the earlier stage of their housing investment,” the study says.
The study by three economists, which was posted on the Reserve Bank’s website yesterday after being presented at a conference it hosted last year, used an economic model to test the impact of scrapping negative gearing, which it described as a subsidy.
It found that lower house prices and a reduced supply of rental property would result in higher rates of home ownership, which would rise from 66.7 per cent now to 72.2 per cent.
The simulation suggested that average mortgages held by homeowners would drop by 21 per cent, while 76 per cent of the population would be left with more income. The study did not assess the impact on household wealth.
The Reserve Bank published the study, which the authors describe as “preliminary and incomplete”, at a time of intense debate over Labor’s proposal to remove negative gearing for established property.
Labor Treasury spokesman Chris Bowen said that while Labor was not advocating the total removal of negative gearing as modelled in the study, the research supported the party’s claim that reforms would improve affordability. “It does indicate that the majority of Australians will be worse off if negative gearing as it currently stands remains in place,” he said.
Acting Treasurer Kelly O’Dwyer said Mr Bowen was showing “desperation” by citing a study that was not modelling Labor’s policy. “The fact Labor boasts about findings that house prices will go down and rents will go up should be of concern to every Australian, whether they’re a prospective first-home buyer who rents or they own their own home,” she said.
Although the study, by academics Yunho Cho, Shuyun May Li and Lawrence Uren, was independent of the Reserve Bank, its presentation at the annual RBA research conference is consistent with the bank’s longstanding con- cerns about the interaction of Australia’s property taxation and levels of housing market debt.
The study found that property investors in the upper 40 per cent of the income distribution would cut their mortgages by between 50 and 67 per cent in the absence of negative gearing The research follows the release, under Freedom of Information, of a Treasury paper suggesting Labor’s negative gearing proposals would have a “relatively modest downward impact on property prices” over the long term, and reports that NSW Treasury urged reform of housing taxation.