Politics Opinion

How Labor can avoid the negative gearing trap

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(Cartoon by Mark David / @MDavidCartoons)

The Labor Government needs to consider alternatives to solving the housing crisis other than abolishing negative gearing, which has failed previously. Frank Jordan reports.

*Also listen to the audio version of this article on Spotify HERE.

THE HOUSING MESS is complex. There are rising and unaffordable rents and housing prices, a lack of rental properties, a reducing proportion of home ownership, no government money available for welfare housing and the risk of a housing bubble that would eventually burst catastrophically.

A knee-jerk reaction and simple solution to this problem would be to abolish negative gearing and increase the capital gains tax. But didn’t former PM Bill Shorten lose the unlosable election when he committed to doing away with negative gearing? No wonder there is a feeling of excitement amongst the Liberals as this proposal gains traction and momentum.

When an investor borrows money to buy a house to rent, the amount of interest payable on the loan is usually much higher than the rent charged. This results in a loss for the landlord. This loss can be subtracted from any other income or profit made by the investor. There is still a loss involved and normally incurring a loss on an investment would be considered the height of stupidity.

The value of a house increases over time and when the house is sold it creates a profit known as a capital gain. This profit is usually significant and exceeds the loss created by the rent shortfall. Tax on a capital gain is halved on an investment held for more than a year compared to tax on rental income which is at the full rate. Now that a profit is being made, what should normally be called “stupid investing” is now given the respectable title of negative gearing.

The idea that an investor can total the profits and losses of all their investments and just pay tax on the net profit is quite fair. The proposal in the case of housing to exclude losses and only count profits violates this principle of net profit and is seen by the business community as grossly unfair and also ridiculous.

What is unfair is that a homeowner is also not allowed to offset the interest charged on their home loan against their other income. Extending this deduction to first-home buyers would remove the unfair advantage that investors have against home buyers.

Counterintuitively, it would also be cheaper for the Government. Over time, there would be fewer investors and more homeowners buying houses. A house that was producing a tax deduction at the highest marginal rate would now be producing a lower deduction since fewer of these new buyers would be on the highest marginal tax rate. The value of the houses and hence the loan would also be lower reducing the tax deduction as well.

In the past, a capital gain was reduced by the amount of inflation during the time the investment was held. To establish this for an investment held for 20 years would involve cumulative calculations of the consumer price index (CPI) for each year. All this was swept aside and replaced by a standard reduction of 50 per cent after a year for all investments, no matter how long they were held.

This present system benefits those who hold investments for a short time and disadvantages those who hold for longer. However, accounting for the effects of inflation is again quite reasonable.

The real problem is not the tax but the capital gain as house prices get higher and higher. The driver of these increases is the lack of sufficient supply. If there were more houses, the average price would stabilise. If prices could remain stable for many years, then eventually, they would reach an affordable level again.

Just as the Reserve Bank is able to intervene to keep interest rates within sensible levels, the Government could mandate the Future Fund to construct sufficient rental houses each year to keep prices stable. This would also avoid the creation of a housing bubble. These dwellings would not be welfare houses but commercially viable houses or units with just enough to keep supply at a level to avoid price inflation. Without excessive capital gains, negative gearing would become stupid investing again. Investment money would seek real capital gains in productive nation-building investments.

At the moment, prospective house buyers need to save up a substantial deposit before they can get a loan to buy a house. So, for many years they have to rent. This is great news for investors since this forces renters to pay off their properties before they are allowed to buy their own. Eliminating the need for a deposit and basing the loan on the ability to repay it would mean more new houses are built. Homeownership would start increasing again.

The present system where deposits are required benefits the banks as well. All the money tied up in deposits is a cheap source of capital that can be lent out at higher interest rates to investors. The banks should be required to actually do due diligence and base their loans solely on the ability to pay.

Waiving the need for a deposit and allowing tax deductibility should only be granted for new houses to ensure an increase in supply. As well, these houses or units should cost less than the median house price. These cheaper dwellings would be quicker to build and use fewer resources, so they wouldn’t put more strain on the supply chain or divert resources into unproductive areas.

Currently, there is about a trillion-dollar government deficit. About two-thirds of this is the result of the economic incompetence of the Liberals. Just the interest bill on this deficit is a crippling charge on the budget. Not to mention the huge drain to begin paying it off. No wonder that there is never any money available for public housing.

This debt needs to be repaid urgently. Raising income tax would penalise those who do the work that generates wealth. Increasing the GST would only suppress economic activity. Instead, a wealth tax would quickly downsize the debt with little damage to the economy.

Australia is currently on track to double its population and at breakneck speed. Slowing this rate of population growth would immediately reduce housing demand.

It would also free up more money for governments to build welfare housing. When new migrants enter Australia, they also need hospitals, roads, schools and water. All this costs money and it is one of the reasons that Australians are individually getting poorer. The total GDP is rising, but the GDP per person is decreasing.

The Labor Party will lose the next election if it abolishes negative gearing or fiddles with the capital gains tax. There are fairer alternatives to deal with the housing mess.

*This article is also available on audio here:

Frank Jordan is co-author of Create More Butterflies. He also ran as a Queensland Senate candidate for the HEMP Party.

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