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.

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