Negative gearing

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Opposition Leader Bill Shorten told Q&amp;A viewers that the federal government spends more on negative gearing and capital gains tax discounts than it does on child care or higher education.
Is that right?
<h2>Checking the source</h2>
When asked for sources to support Shorten’s statement, an ALP spokesperson said the Grattan Institute has estimated the cost of the capital gains tax and negative gearing concessions at $11.7 billion per year.
The Treasury’s tax expenditure statement (TES) lists the cost of the capital gains tax discount as $6.15b for 2015-16. The TES does not list the cost of negative gearing, but using Grattan’s total figure and subtracting the value of the capital gains tax discount, this shows that the cost of negative gearing is around $5.5 billion… this cost exceeds the cost of child care assistance or university education as per the budget papers.
You can read the longer response <a href="https://theconversation.com/full-response-from-labor-spokesperson-61201" target="_blank">here</a>.
So, does federal government spending on child care or higher education outstrip the cost of revenue forgone due to negative gearing and capital gains tax (CGT)?
<h2>How much does the government spend on child care subsidies?</h2>
This year’s budget showed the federal government is estimated to spend about $8.2 billion on child care fee assistance in 2016-17. That’s comprised of about $4.2 billion for the child care benefit and about $3.9 billion for the child care rebate.
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<img src="/images/2016/06/21/image-20160614-17209-1gramrh.png" alt="">
Budget Paper 1, 2016-17 Federal Budget.
Here’s a graph produced by the Parliamentary Budget Office showing how the cost of child care subsidies is projected to change over time.
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<a class="source" href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Chart_packs">Parliamentary Budget Office</a>
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<h2>How much does the government spend on higher education?</h2>
This year’s budget shows that the federal government is estimated to spend about $9.5 billion on higher education in 2016-17, an amount which is fairly stable over the forward estimates period. It is projected to be about $9.4 billion by 2019-20.
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<img src="/images/2016/06/21/image-20160615-22416-5uy7q4.png" alt="">
Budget paper 1, 2016-17 federal budget.
Here’s a graph produced by the Parliamentary Budget Office showing how the cost of higher education expenses is projected to change over time.
<a href="/images/2016/06/21/image-20160615-22411-1qzpsjt.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/image-20160615-22411-1qzpsjt.png" alt="">
Parliamentary Budget Office
<h2>How much do negative gearing and capital gains tax concessions cost the government in revenue forgone?</h2>
Capital gains tax: As Labor’s spokesperson says, the Treasury’s 2015 tax expenditure statement (TES) lists the cost of the capital gains tax discount as $6.15 billion for 2015-16.
According to Treasury’s estimates of tax expenditures, the “cost” associated with the capital gains tax discount for individuals and trusts is estimated to be $6.8 billion in 2016-17, rising to $9.09 billion in 2019-20. Note that this estimate does not include any estimate for the concessional treatment of owner-occupied housing.
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<img src="/images/2016/06/21/image-20160615-22398-cw74xm.png" alt="">
Budget Paper 1, 2016-17 federal budget.
Negative gearing: This is where it gets tricky. Treasury does not regard negative gearing as a “tax expenditure” and thus does not provide any estimates for the “revenue foregone” as a result of it. So we have to look at other sources for estimates.
Labor has inferred from the Grattan Institute’s report that the cost of negative gearing is around $5.5 billion ($11.7 billion minus the $6.15 billion cost of the CGT discount).
Labor did not provide The Conversation with any Parliamentary Budget Office (PBO) estimates on the cost of negative gearing to The Conversation. Labor’s spokesman said only that the PBO estimated Labor’s plan to restrict negative gearing to new property and to halve the capital gains tax discount could raise $565 million over the forward estimates.
The Greens put the cost of negative gearing at somewhere around $4 billion a year.
A 2015 report by The Australia Institute said that modelling by National Centre for Social and Economic Modelling (NATSEM) estimated that:
negative gearing of residential investment property is currently reducing tax revenue by $3.7 billion per year.
Ben Phillips, Associate Professor at the ANU Centre for Social Research and Methods (who previously conducted the NATSEM modelling quoted by The Australia Institute), reported in February 2016 that:
We estimate that in 2017-18 the total tax savings from negatively gearing properties is $4.3 billion.
And I have previously estimated that negative gearing costs more than $5 billion per annum in revenue forgone – although that estimate was for the 2010-11 financial year when interest rates were considerably higher than they are today. It was also a “gross” figure that did not allow for the impact of interest expenses being carried forward to be offset against future capital gains tax liabilities.
So what’s the combined cost of negative gearing and CGT? Nobody knows for sure. It could be as high as $11.7 billion, as the Grattan Institute has <a href="https://grattan.edu.au/report/hot-property/">said</a>. It could also be lower.
<h2>So does CGT and negative gearing cost more than child care or higher education?</h2>
This year’s budget showed the federal government is estimated to spend about $8.2 billion on child care fee assistance and about $9.5 billion on higher education in 2016-17.
Using the estimates outlined above, the combined annual effective cost of negative gearing and capital gains tax discounts to the public purse in revenue foregone is somewhere between about $9 billion and $11.7 billion (although no-one knows for sure because of differing opinions on the cost of negative gearing).
So Shorten’s statement that Australia is “spending more at the Commonwealth level on negative gearing and capital gains tax discounts than we are on child care or higher education” is likely to be somewhere in the ball park – but it’s impossible to say conclusively.
<h2>A word of caution</h2>
It’s worth remembering that none of the major parties are advocating scrapping negative gearing altogether.
And finally, it is worth drawing attention to Treasury’s caution that its estimates of tax expenditures such as the capital gains tax discount assume that taxpayer behaviour is unaffected by the existence of the concessional tax treatment. That assumption that may not be valid in practice, so that these estimates:
do not indicate the revenue gain to the budget if specific tax expenditures were to be abolished…. care needs to be taken when comparing tax expenditures with direct expenditures as they may measure different things.
<h2>Verdict</h2>
Is Australia “spending more at the Commonwealth level on negative gearing and capital gains tax discounts than we are on child care or higher education”?
Nobody knows for sure, because of the difficulty in measuring exactly how much negative gearing tax breaks cost the federal government every year in revenue foregone. (Treasury cautions against comparing tax expenditures with direct expenditures as they may measure different things.)
Using available estimates, however, Bill Shorten’s statement is probably in the ballpark.
<h2>Review</h2>
I agree with this assessment of the statement. There are official estimates on the projected spending on childcare, education and the revenue foregone in relation to the capital gains tax discount, although as Treasury notes these figures may not be directly comparable. It is more difficult to estimate the foregone revenue in relation to negative gearing as there are no official estimates. Each model will come up with a different estimate based on the parameters used for the estimate.
I would also caution that the statement by Bill Shorten should be read in conjunction with proposed ALP policies in these areas. In particular, tax concessions on negative gearing and the CGT discount will be pared back but negative gearing will still be available to taxpayers currently holding investment properties, and the CGT discount will be halved but not removed.
Given the difficulties in identifying the cost of negative gearing and the problems inherent in comparing data measured differently, the statement is within reasonable estimates. – Helen Hodgson
 
Saul Eslake is vice-chancellor’s fellow, University of Tasmania and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/saul-eslake-665" target="_blank">here</a>.
Helen Hodgson is associate professor, Curtin Law School and Curtin Business School, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/helen-hodgson-94553" target="_blank">here</a>.
 
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What’s the combined cost of negative gearing and CGT? Saul Eslake

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GUEST OBSERVER
Tax reform to target Australia’s distorting capital gains tax and negative gearing regimes could net the government A$5.3 billion in tax revenue per year, according to a new report from the Grattan Institute.
<a href="https://grattan.edu.au/report/hot-property/" target="_blank">The report</a> recommends reducing the capital gains tax discount for individuals and trusts to 25 percent, and phasing in limits to negative gearing over 10 years.
“The case for reform is extremely strong and we do not think that this is likely to lead to a material crash in the housing market,” said the report’s author John Daley.
Daley and report co-author Danielle Wood have modelled the impact of their recommendation on house prices, rents and the rate of new housing development, estimating house prices would be 2 percent lower than otherwise.
Under their suggested tax changes people would no longer be able to write off losses from passive investments like housing against unrelated wage income.
“The only developed country we have found that lets you deduct the costs of interest and allows you to deduct it from your labour income apart from us is New Zealand,” Daley said.
Curtin Law School Associate Professor Helen Hodgson said the proposals were well balanced, based on sound evidence, and would improve the efficiency and fairness of the tax system.
She said the challenge was to claw back concessions without creating further distortions. “In that respect the Grattan Institute recommendations go further than those proposed by the Australian Labor Party.
“The ALP proposals allow existing negatively geared properties to remain deductible. This would have a lock in effect similar to the pre-CGT exemption from capital gains tax. Borrowers would be reluctant to sell their property and reinvest in other, potentially more productive, forms of investment.
The Labor Party proposal would reduce the capital gains tax discount to 25 percent and restrict negative gearing to new properties only.
Daley said this approach was likely to create a new distortion in the housing market.
“Essentially those new houses will be higher priced than the older houses and so you’ll get a distortion as investors disproportionately show up to the auctions for new housing and owner-occupiers disproportionately show up to the auctions for old housing. I’m not sure why we’d want to encourage that.”
Prime Minister Malcolm Turnbull has argued Labor’s proposal would deliver <a href="https://theconversation.com/negative-gearing-changes-wont-drive-all-investors-from-the-housing-market-heres-why-55505">“</a>massive shocks” to the residential housing market, removing all investors. Finance Minister Mathias Cormann has said it would drive down the value of established properties, and push up the cost of rental accommodation.
But Daley said given new housing supply was significantly restricted by planning rules rather than inadequate returns, it was unlikely there would be any material impact on supply or rents.
“As Commonwealth Bank CEO Ian Narev, who sits on a loan book of $400 billion has said, what keeps him awake at night is interest rates and unemployment rates, not negative gearing.”
Data from the Australia Tax Office shows negative gearing is more popular among taxpayers on higher incomes, and the Grattan Institute argues it largely benefits the wealthy.
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<h4>
Taxable income is income after deductions, including rental loss deductions. ATO/Grattan Institute, Author provided
</h4>
Reforming the system would result in more funds instead flowing into equities, businesses and bank deposits.
“The current regime pushes people into property, it encourages them into much higher leverage than they would have otherwise, and that increases the volatility of the housing market and the vulnerability of the financial system,” Daley said.
 
Charis Palmer is deputy business editor, The Conversation, and can be contacted <a href="https://theconversation.com/au/team#charis-palmer" target="_blank">here</a>.
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Negative gearing windbacks could deliver $5.3bn a year: Grattan Institute

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GUEST OBSERVER
Recent announcements by both major parties suggest the long-held bipartisan consensus over negative gearing is finally breaking.
While we can expect anguished cries from the property industry, the two proposals for reform point to just how deeply flawed negative gearing is, and why neither change goes far enough.
The proposals point to two deep contradictions at the heart of negative gearing: it is designed to deal with housing affordability (that is, demand for housing is higher than supply) by increasing demand; and it is a policy to encourage savings, that simultaneously encourages debt, and rewards those who already save far more than those who find it difficult to save.
First, though, it’s useful to clarify what negative gearing is. It’s a tax rule that allows investors (not only property investors, but mainly property investors) who run their investment at a loss to claim that loss against their other income.
Why would a rental property run at a loss? Usually because the investor borrows most of the purchase price, and interest repayments on the loan (mortgage) are higher than the income (rent).
In most other countries this would mean the investor did not have to pay tax on the rent they received. But it would not allow them to reduce the tax they pay on their other (usually wage and salary) income. Australia is an exception.
So negative gearing encourages people to invest in property, and it particularly encourages them to invest by borrowing most of the price of the house. It might already be obvious why this is a very odd kind of housing and investment policy, seemingly designed to encourage people to over-extend and expose themselves to big risks if property prices were to fall.
<h2>A false fix for affordability</h2>
However, the property industry has long argued that negative gearing helps housing affordability, particularly for renters, by expanding the supply of rental housing. Yet, as opposition treasury spokesman Chris Bowen has recently argued, 93% of negatively geared properties were existing stock – the new owners simply bought them off someone else.
Labor’s policy is to restrict negative gearing to new properties. And given the current policy setting, that is likely to have a positive impact.
But think for a moment about the logic of “increasing supply”. Negative gearing is not a subsidy for builders, it’s a subsidy for buyers. That’s right. The problem is one of too many buyers willing to pay high prices, and negative gearing is designed to create more buyers willing to pay more.
Of course, Labor’s policy will restrict the increased demand to new housing stock. But it highlights a deeper problem in the housing market.
Private developers increase supply only if it is profitable, which is usually when prices are rising. If supply were increased without increasing demand (for example, by direct government investment) that would likely contain rising prices. Doing so through the market, however, simply recreates the existing problem.
<h2>And what about rental prices?</h2>
Critics would argue I am focusing only on housing prices, not rents. Negative gearing is designed to lower rents by allowing investors to rent at a loss. The problem here is that renting at a loss is still a loss unless something else is going on. That something else is capital gains.
Negative gearing only makes sense as an investment strategy because investors make their real money by buying low and selling high. So it works only if house prices are increasing. To the extent it contains rents it only does so “relatively”: rents rise less rapidly than house prices, but both go up because of the scale of new demand.
In some market segments (especially the bottom end) new supply can make things worse. Indeed, “new supply” often increases rents because it demolishes older, cheaper housing to make newer, fancier and more expensive housing. On this score, the best part of Labor’s announcement is the reduction in the tax concession for capital gains. 
Negative gearing’s other claimed benefit is that it encourages people to save. In practice, this “saving” is coupled with large new debts.
This is a serious economic problem because it means tens of thousands of Australian households have been encouraged to take on debt that they might not be able to sustain if house prices fall. And that means governments are forced to keep house prices high to avoid serious economic consequences – as the Rudd government did by increasing first home buyer grants during the GFC.
Second, negative gearing is a tax deduction. That means the higher your marginal tax rate, the more you get. Someone on $200,000 will receive about half their loss back. Someone on $30,000 will only get about a fifth.
So the rewards for saving are much greater for high-income earners (who already save a lot) than for low-income earners (who struggle to save).
This helps explain how two apparently contradictory claims are both true. Most negatively geared investors are mums and dads; nurses and police officers. Yet most of the gains from negative gearing go to the very top of the income distribution.
This is because most of the gains go to a small subset of investors with lots of properties and on very high incomes. The “mums and dads” get a relative pittance.
<h2>Much more needs to be done</h2>
The government seems to know it can raise significant revenue and target only a small group of investors. It can leave the mums and dads alone and still correct most of the inequality and expense by putting a cap on how much any one investor can claim. How far it actually goes remains to be seen.
So both proposals do good things. But once you understand the problems they are meant to resolve, you realise it is almost impossible to make negative gearing “good policy”.
Neither plan “fixes” the problem. They are mitigation at best.
Maybe we can see them both as first steps. After all, with so many investors so heavily indebted, any policy that pulled the rug out all at once has serious economic risks.
We can only hope these policies are the first instalment. Governments serious about housing affordability will also need to invest directly in new supply by funding social and affordable housing. 
Ben Spies-Butcher is lecturer in economy and society, Department of Sociology, Macquarie University and author for The Conversation.
He can be contacted <a href="https://theconversation.com/profiles/ben-spies-butcher-145" target="_blank">here</a>.
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A first step on negative gearing, but not much more

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GUEST OBSERVER
There is much confusion about the effects of Labor’s tax proposals with respect to investors in rental housing. They propose to grandfather existing arrangements. But investors in the future can only negatively gear newly constructed housing, while the policy recommends the capital gains discount fall from 50% to 25%.
Claims by Prime Minister Malcolm Turnbull that house prices will collapse appear to be contradicted by his assistant treasurer Kelly O'Dwyer who claims that housing costs will soar. These puzzling assertions arise due to a failure to distinguish between the market in rental housing, where housing is leased, and the market in which investors and owner occupiers buy and sell housing. Critically these two markets are interrelated.
To see why, consider the first round effects of Labor’s proposals when we put the grandfathering arrangements to one side (for the moment). Some existing investors will sell up when leases come up for renewal. There are now more tenants seeking rental housing opportunities than there is supply to meet their demand. Rents will begin to rise.
But the houses which investors quit add to the properties available for sale; there are now more houses available for purchase than there are buyers. House prices will begin to fall.
These market signals trigger a second round of effects. Some tenants will elect to buy rather than rent. After all renting has become more expensive and home ownership has become cheaper. These second round effects help to put a floor under falls in house prices, and help cap rent rises.
By considering the inter-relationships between the two markets we can understand how the government has issued apparently contradictory statements. Rents will rise and so the housing costs of tenants will increase. But there will be falls in house prices (or more likely a slower growth in prices); while existing owners take a hit, first home buyers housing costs are lower and attainment of home ownership becomes more affordable.
The second round effects mean that impacts are likely to be muted. This is made even more likely by a grandfathering proposal that should prevent a stampede by existing investors seeking to relinquish their property investments.
A disappointing aspect of the debate so far has been its neglect of the longer term structural consequences of Labor’s suggested reforms. Our current arrangements encourage high tax bracket investors to take on debt in the “chase” for capital gains. Capital gains are leniently taxed as compared to ordinary sources of income, such as earnings and rents.
Only 50% of capital gains are added to assessable incomes. This is particularly attractive to high tax bracket investors. Moreover, they are taxed on realisation rather than as they accrue. The shrewd investor realises the gains when assessable income from other sources declines; for example, following retirement when the investor’s marginal tax rate commonly falls.
There are not enough high tax bracket investors willing and able to invest in all our private rental housing stock. They tend to cluster in those segments of the market where healthy capital growth is expected, but rental yields are lower. Low tax bracket investors tend to cluster in segments where capital growth is expected to be subdued. Typically these are areas with lower house prices. To ensure adequate returns rental yields have to be higher in these low house price segments.
We therefore get a distorted investment pattern that disadvantages the supply of affordable rental housing.
Labor’s proposals will curb these distortionary effects by reducing the capital gains discount. They will also reduce the tax incentives to leverage investments. Rising indebtedness is a threat to the resilience and stability of our housing market.
Many believe that repayment and investment risks carried by heavily indebted home buyers played a central role in precipitating the global financial crisis. Tax concessions that favour taking on debt exacerbate those risks. If Labor’s proposals succeed in attracting attention to these and other structural problems that plague Australian housing markets, they will have a much wider significance.
 
Gavin Wood is professor of housing, RMIT University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/gavin-wood-113723" target="_blank">here</a>.
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Will Australian house prices collapse if negative gearing changes?

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GUEST OBSERVER
After Labor announced proposed changes to negative gearing and the capital gains tax discount, Prime Minister Malcolm Turnbull told parliament that the policy would administer two contradictory shocks, massive shocks, to the residential housing market. 
They are proposing to remove from the market for established dwellings one-third of demand. All investors would be gone. When I say all investors, I mean all investors.
That assertion was questioned by some listeners at the time, including The Guardian’s Katharine Murphy.
Does the prime minister’s claim stack up?
<h2>Not all property investors negatively gear</h2>
Data is not directly available on what proportion of home purchases are made by investors. Data on new home lending from The Australian Bureau of Statistics' Lending Finance figures indicates that between one-third and half of new lending is to investors. And ABS census data shows that just under a third of existing properties are owned by investors.
But not all of them negatively gear. Some do not borrow, and others do not borrow enough to be negatively geared: that is, their rental income is greater than the expenses and loan interest. The tax stats show us that about two-thirds of all housing investors are negatively geared. This suggests that around 20% of housing buyers are negatively geared investors.
<h2>Investor demand for housing will reduce – but not disappear</h2>
Labor’s proposed changes will reduce the after-tax returns on property investment.
Although negative gearing has attracted more attention, Labor’s proposed changes to capital gains tax will have a bigger impact on returns. Reducing the discount from 50% to 25% will increase the effective tax rates on capital gains, bringing the tax rates closer to those that apply to other sources of investment income such as rental income and bank interest.
Labor’s proposed changes to negative gearing will also have an impact. Under the policy, investors who make rental losses – because their rental income is less than their costs, including loan interest costs – will no longer be able to write-off those losses against wage and salary income. But for people investing in new housing there will be no change: they will still able to write-off losses against all forms of individual income.
For most investors in existing properties, the changes to negative gearing mainly affect the timing, not the amount, of tax deductions. Losses can still be deducted against investment income, including subsequent capital gains. But negative gearing may lose some of its psychological appeal. While there is no hard research for Australia, some investment advisors have warned against placing too much emphasis on tax breaks (particularly tax breaks on wages) and not enough on the financial returns to the investment.
Together these policies will reduce investor demand for housing. Indeed, one of Labor’s stated aims of the policy is to make it easier for first home buyers to get into the market.
Some investors will switch to other investment opportunities that offer higher post-tax returns. Others might choose to spend more and invest less. But some will also continue to invest in the housing market, and either borrow less, or simply accept a lower return on investment.
The extent to which investors will vacate the property market will ultimately depend on how much post-tax returns fall, and how sensitive is investor demand for property to changes in returns (what economists would call the “elasticity of demand”).
Our estimates suggest that the changes in effective tax rates from Labor’s policy are relatively modest.
Consider an investor in the top tax bracket, paying 45 cents in the dollar on their marginal income and earning a 6% nominal return on their property (half from rental income, half from capital gain). Let’s say the investor buys a property and then sells it after seven years.
Effective tax rates calculate how much tax is paid on the profit made by the taxpayer. If the investor buys the property outright, the effective tax rate will increase from 33% to 35% under Labor’s policy. If the same investor borrows 40% of the house value then effective tax rates increase from 19% to 22%. And for a negatively geared investor borrowing 80% of the property value, the effective tax rate changes from 5% to 9%.
<a href="/images/2016/03/9/image-20160307-30467-5ajcud.JPG" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/9/image-20160307-30467-5ajcud.JPG" alt="">
 
And any changes in post-tax returns under Labor’s policies may be swamped by annual fluctuations in property prices. As the Commonwealth Bank of Australia Chief Executive Ian Narev recently noted:
I can tell you having a $400 billion home loan book – your assumptions on unemployment and what’s happening in global interest rates will dwarf whatever assumptions you’ve got on the modelling about the impact of negative gearing by a factor of… I can’t tell you the number but it’s a big number.
<h2>A massive shock?</h2>
Under Labor’s policy, other passive investments that generate capital gains, such as shares, will also be subject to a more stringent tax treatment. Other investments that will be relatively more attractive after the change – for example, superannuation and bank deposits – have a very different profile of risk, return and liquidity.
No-one can ever perfectly predict investor behaviour. Ultimately, there are a whole host of factors that people take into account when investing in property, including rental returns (particularly for the one third of positively geared investors), risk perception, familiarity with the asset class and ability to obtain bank finance. In our opinion, modest changes in tax treatment are unlikely to change the decision-making calculus for the majority of investors.
Indeed, looking at other countries with less generous tax treatment for investment properties – US, Canada, Germany and France, for example – there is still plenty of investor activity in housing.
Given the evidence we have seen, it is overreach for the prime minister to say that Labor’s policy will drive away all investors away.
Danielle Wood is fellow, Australian Perspectives, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/danielle-wood-147710" target="_blank">here</a>.
John Daley is chief executive officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>.
Both are authors for The Conversation.
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Negative gearing changes won't mean all investors depart market

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GUEST OBSERVER
The Real Estate Institute of Australia (REIA) has unleashed the hounds on Labor’s proposed reforms to negative gearing.
The REIA’s campaign, Negative Gearing Affects Everyone, follows the lead of the Property Council, which describes the Australian housing market as a “house of cards”, with the REIA stressing how “fragile” the Australian economy is. You might be tempted to dismiss this as propaganda from people who exaggerate for a living, but evidence is mounting of instability close to the REIA’s home: the off-the-plan apartment sector.
An array of forces are converging to give the multi-unit house of cards a shove. Over the past couple of years apartment development has boomed. The Australian Bureau of Statistics shows building approvals for new flats, units and apartments reached a huge peak last year. It has stepped down in the most recent quarter, but is still very high.
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<h4>ABS, 8731.0 Building approvals, Table 6</h4>
You can see this development in the skylines of our cities, especially in Sydney, Melbourne, Brisbane and Canberra – and in the RLB Crane Index. RLB counts a total of almost 650 cranes engaged in construction in our capital cities, and says more than 80% of these are on residential projects.
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<img src="/images/2016/05/27/image-20160525-25245-if8dg7.png" alt="">
<h4>RLB Crane Index, 8th Edition</h4>
This coming supply is reflected in CoreLogic’s projections for new units hitting the market. It estimates that sales for more than 92,000 new units will be settled in the next 12 months, only slightly less than last year’s total number of sales of new and established units. The year after, a further 139,000 new units sales are due to be settled, substantially more than total sales (new and established) last year.
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<img src="/images/2016/05/27/image-20160526-17553-1387xjw.png" alt="">
<h4>Source: CoreLogic</h4>
<h2>Dampeners on demand</h2>
But for all this supply, it appears there may be much less demand than anticipated, particularly from the foreign investors who did so much to stoke the boom. Evidence for this includes:
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Over the last six months the Chinese government has tightened controls over currency exchange by its citizens. This has restricted their capacity to buy – and repay loans to buy – property in Australia and elsewhere. This in turn has led to…
</li>
<li>
Credit restrictions by Australian banks. Last month each of the Big Four banks restricted how much they’ll lend to foreign buyers (lower loan-to-valuation ratios), with Westpac withdrawing altogether. This month, Macquarie has pulled its horns in.
</li>
<li>
The Victorian government has doubled the stamp duty payable by foreigners – it’s now 7 percent of the property purchase price. The NSW government is reported to be considering doing something similar; it is also introducing checks for residency and Foreign Investment Review Board approvals as a condition for conveyance of property titles, and the FIRB is now charging $5,000 for applications.
</li>
</ul>
Foreign demand for new dwellings (as gauged by the NAB’s Quarterly Australian Residential Property Survey) was already down over the first quarter of the year, before the credit restrictions cut in. Now the media are reporting that Chinese demand for apartments has “fallen off dramatically”: Meriton says the number of Chinese buyers of its apartments halved in the last month.
As those cranes in the sky indicate, there’s a lot of people out there – foreign and local – who’ve paid deposits and entered into contracts to pay boom-era prices on completion of their units. When they go to the bank to borrow the balance, they may find that, between lower loan-to-valuation ratios and lower valuations, they are caught short. Some might make up the difference by selling another property, but many of those settlements projected by CoreLogic may not settle at all.
The result: deposits forfeited, unsold units dumped on the market – accelerating the bust – and possibly, at least for buyers who are actually in the jurisdiction, the threat of being sued by developers for the loss of the contracted higher price.
<h2>So what might policymakers do?</h2>
Faced with such a calamity, why won’t our politicians do something to shore up demand for all these newly constructed rental properties? Oh wait….
This is precisely what Labor’s proposed negative-gearing reform promises do, by allowing rental losses to be set against non-rental income only where the property is newly built. Under Treasurer Bowen, Australia’s dedicated army of negative gearers would be given new direction and purpose, switching from the established dwelling market into the new-built market deserted by foreign buyers. Furthermore, because no-one after the first purchaser can call a dwelling new (and hence get the same preferential treatment on their gearing), they may be inclined to hang on to their properties even as demand looks weak.
We should still expect such a reform to reduce total investor demand for housing, and hence reduce house prices overall. These are both good things. But it may also help cushion what might otherwise be a drastic and painful collapse in the new-build sector.
Both the REIA and the Coalition government talk about Australia’s “transitioning” economy. They should consider negative-gearing reform as a measure for transitioning out of our presently fragile, property-bubble-led economy.
Chris Martin is research fellow, Housing Policy and Practice, UNSW Australia and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/chris-martin-203935" target="_blank">here</a>.
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Might Labor’s negative-gearing policy yet save the housing market?

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GUEST OBSERVER
Federal Opposition Leader Bill Shorten has announced plans to change negative gearing and the capital gains tax discount if Labor wins the next federal election.
Under costings released from the Parliamentary Budget Office, Labor’s proposed changes could save the budget $32.1 billion over 10 years once they come into force.
Key measures include:
<ul>
<li>Negative gearing to be restricted to "newly constructed homes"</li>
<li>Capital gains tax discount reduced from 50% to 25%</li>
<li>Both measures would come into force from July 2017</li>
<li>All existing investments under the scheme would be fully "grandfathered" and protected against the changes</li>
</ul>
With pressure on the current government to reduce the growing Budget deficit, and Treasurer Scott Morrison's refusal to rule out any changes in policy across the board, negative gearing would seem to be the one area squarely in the sights of both the government and the opposition, especially when you look at the statistics…
<ul>
<li>There are currently 1.2 million people who have negatively geared property, and most of these people are middle class Australians.</li>
<li>Australian Tax Office statistics show negatively geared property investors claim over $13 billion in losses each year, and the average loss per negatively geared investor is over $11,000</li>
<li>The average loss per negatively geared property doubles for people earning more than $180,000, to over $24,000.</li>
</ul>
Should our governments look beyond the numbers? Is it a false economy just to think that by tinkering with negative gearing it will solve the budgetary problem?
5 Reasons Why the Government Shouldn't Change Negative Gearing
1. Growing Population
With Australia's population set to grow significantly over the coming decades, our governments should be asking "How will we house these people?"
The government does not have the capacity, nor the finance, to provide public housing for the growing population so this is left to the private sector.
Negative gearing allows more Australians to invest in property, as the tax benefits assist with the cash flow to invest and hold onto that property. If negative gearing is changed and CGT concessions are reduced, it will mean less investors, less demand and less houses, and it will place further pressure on the government to fund and provide housing.
2. Financial Pressures of the Ageing Population
There are currently 1.2 million middle class Australians investing in property to generate a capital gain and increase their asset base for retirement, to subsequently ensure that they can maintain a standard of living in their retirement without having to solely rely on the aged pension.
If the government creates a blockage into entry for property investment by chipping away at the tax benefits or reduce capital gain concessions, property investment becomes less attractive. In the long term, this will see more Australians relying on government pensions, meaning less self-funded retirees and therefore further pressure will be placed on future budgets.
The government needs to take a long term view and look beyond today. A change to negative gearing and capital gain concessions will only make matters worse in the future.
3. A Drop in Property Prices
Will a change in negative gearing and capital gain concessions disincentivise investors and, if so, what impact will this have on property prices?
In the short term, we may see a dip in property prices due to lower demand and increased supply – which will impact on the economy across the board. State governments will miss out on a large chunk of revenue (via loss of stamp duties), which could mean less funding to spend on things such as education, hospitals and infrastructure at a state level. The federal government will then have to fork out more to state governments to compensate.
4. Knock On Effect to the Economy
Will the changes deter people from investing in property?
Due to the loss of the tax benefits, people will not be able to fund the cash flow of an investment property, meaning they simply won’t buy investment properties. This will cause a knock on effect similar to what we have seen in the mining industry after the boom.
It could also mean a rise in unemployment in the building sector and associated industries such as white goods, electrical and service related industries like real estate and everything that goes with it. As previously mentioned, state governments will be impacted with less revenue from stamp duties to spend on state infrastructures – which would also mean less jobs.
5. Short Term Thinking
For all of the reasons above, I can understand why the government might look at the numbers in front of them and think changing the rules around negative gearing and capital gain concessions is a win for budgetary reasons, but it is simply a case of short term thinking. The government really needs to take a deep breath, sit back and carefully consider what impact this will have on the economy long term.
Any changes made may increase revenue today, but they – or should I say we – could end up paying for this 10, 20 or 30 years down the track. To put it bluntly, a short term gain for long term pain is not good business.
With 1.2 million middle class Australian property investors impacted, changing the rules are negative gearing and capital gains concessions would be highly unpopular – and it could be a game changer for either political party.
David Naylor is co-founder &amp; non-executive director, Chan and Naylor National Accounting Group and can be contacted <a href="https://www.chan-naylor.com.au/" target="_blank">here</a>.
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Property 101: Five reasons why the government shouldn't change negative gearing

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The Property Council of Australia, a lobby group representing the biggest real estate developers, has shaped election debate about negative gearing and some taxes. 
We see their spokespeople quoted in the papers and their ads on TV, but beyond that we know very little about how Australia’s lobby groups get what they want. This series shines a light on the strategies, political alignment and policy platforms of eight lobby groups that can influence this election.
Housing affordability and tax reform have shaped up to be two of the defining issues this election. The Property Council of Australia – which describes itself as “the Voice of Leadership” – has helped frame the debate on behalf of its 2200 company members.
The council began as the Building Owners and Managers’ Association of Australia (BOMA) in 1969, and was renamed the Property Council of Australia in 1996, with advocacy a core focus. The Residential Development Council and International and Capital Markets division were formed in 2001 and the Retirement Living Council in 2015.
With a board of directors drawn from Australia’s largest residential and commercial developers, the Property Council’s considerable annual revenue (A$27.3 million in 2015) is drawn primarily from membership fees and services.
<img src="/images/2016/06/17/image-20160616-19904-eyhn6q.png" alt="">
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The financial stakes are high when it comes to lobbying for regulatory settings which favour property development and investment. The Property Council’s healthy budget for advocacy and communication ($6.4 million and $1 million in 2015 alone) has generated a voluminous amount of reports, advertising campaigns and government submissions on taxation and planning reform. Another $7.2 million for “networking” ensures that this information is disseminated where it counts.
These deep coffers have funded the Council’s high profile television campaign to preserve negative gearing and capital gains tax discounts in response to mooted changes early this year. Likening the housing market to a fragile house of cards on the brink of collapse, the ad (released on 22 February) carried a menacing warning, “don’t play with property.”
The government has got the message. The Treasurer, Scott Morrison, who served as National Policy and Research Manager for the Council between 1989-1995 ruled out changes to negative gearing in the lead up to the 2016 Budget. Despite speaking out against negative gearing prior to becoming Prime Minister, Malcom Turnbull also changed his tune recently, rejecting  “reckless” changes to existing arrangements and suggesting that aspiring home buyers hit up their parents for help.
While the campaign to retain negative gearing is the Property Council’s most visible, behind the scenes the council has been busy meeting with government and writing submissions. In 2015 alone, the NSW division wrote 55 submissions and attended an extraordinary 230 government meetings. Its 2016 election brochure presents a number of “solutions” to “grow the economy through property”. Here are some highlights.
<h2>Negative gearing and the CGT</h2>
The council wants to retain negative gearing (which allow interest rates and other expenses associated with housing investment to be offset against total income) and capital gains tax discounts on investment properties. This is despite substantial evidence that these bonuses stimulate demand for housing, pushing up prices and leaving first home buyers unable to compete. But by framing housing affordability problems as a symptom of supply side pressures rather than demand side incentives, the council shifts the affordability debate to planning reform.
<h2>Housing and planning reform</h2>
Current incentives for property investment (such as negative gearing) don’t target new housing supply - only a small proportion of investor loans finance new dwellings. So the Council argues that Commonwealth payments to the states for “micro economic reform” should incentivise planning system changes needed to “turbocharge housing supply pipelines and deliver innovative affordable housing solutions.”
This is a tired argument which ignores the years of planning reform already undertaken by the states and territories, while levels of new housing production are currently at their highest in decades. This supply has done little to dampen price inflation in a market awash with domestic and foreign investors.
While the Property Council always bangs on about bottlenecks in housing supply (which it argues are caused by planning system constraints), such arguments miss the obvious issue that prices are a result of an interaction of supply and demand. What the combination of negative gearing and capital gains tax do is to drive demand so hard in boom times that even with sharp increases in supply, prices keep on rising, especially in today’s low interest environment.
The chart below shows this problem with respect to Sydney. It shows dwelling completions falling slowly when prices flatlined after the 1996-2004 boom, but rising in line with price inflation from mid 2011 on.
<a href="/images/2016/06/17/image-20160616-19949-lktfvl.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/17/image-20160616-19949-lktfvl.jpg" alt="">
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<div class="content" data-raw="">
Prices: Department of Family and Community Services, Rent and Sales Report. Source: Completions. NSW Department of Planning, CC BY-SA
The Council’s election platform does call for institutional investment in affordable and social housing, and this is one idea worth taking up.
<h2>Cities and Infrastructure</h2>
The Property Council support long term infrastructure planning and delivery, coordinated by Infrastructure Australia. Who doesn’t?
But the problem is how to assign the costs and benefits. Land value rises due to investments in public infrastructure – such as a new rail line or road – are typically pocketed by landowners and developers.
Commonwealth and state governments are now canvassing value capture arrangements which would use some of this uplift to offset costs of provision. The council oppose this model, instead suggesting Tax Increment Financing (TIF), which leverages increases to commercial rates in defined districts.
While popular in some parts of the US, it has not been proven effective for larger schemes. It would be difficult to implement in Australia because our recurrent property charges are much lower than the US.
The Property Council also wants existing development contributions towards basic facilities like open space, local roads, and footpaths to be wound back, along with stamp duties on property transactions.
The idea of removing stamp duty has some merit (at least for domestic purchasers), since taxes on property transactions can discourage mobility, deterring retirees from moving to a smaller home, for example. But experts think stamp duty should be replaced by land taxes, to encourage more efficient use of land.
This would also provide a mechanism for capturing back values arising from public infrastructure investment. Not surprisingly, the Property Council thinks otherwise, calling instead for a higher GST.
While the Property Council complains about unfair tax burdens on its members, they seem content to spend a lot of money on their advocacy and networking activities. Described by economists as “premium seeking expenditure”, lobbying for more generous regulatory and financial settings clearly promises a high return for the property sector.
But it’s important to remember that despite their size, the Property Council only represents a portion of the development, construction, and real estate industry - they don’t really cover many smaller suburban developers or house builders.
The question is whether the “Voice of Leadership” will dominate the agenda or whether wider perspectives on housing and cities will be heard.
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<div class="profile-occupation grid-eight grid-prepend-three"> </div>
<div class="profile-occupation grid-eight grid-prepend-three">Nicole Gurran is professor - urban and regional planning, University of Sydney and can be contacted <a href="https://theconversation.com/profiles/nicole-gurran-759" target="_blank">here</a>.</div>
</div>
</div>
Peter Phibbs is chair of urban planning and policy, University of Sydney and can be contacted <a href="https://theconversation.com/profiles/peter-phibbs-27130" target="_blank">here</a>.
</div>
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How the Property Council is shaping debate around negative gearing

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
A memo on the subject of housing taxation from the Reserve Bank of Australia (RBA) is stirring up debate on proposed changes to negative gearing and capital gains tax in the election campaign.
The memo, dated December 9 2014, does counter the government’s claim that changes to negative gearing will have an adverse effect on housing prices, although this was never its intended purpose.
The memo was in response to the report from the Financial System Inquiry two weeks earlier. The inquiry noted that reducing capital gains tax concessions would “lead to a more efficient allocation of funding in the economy,” that “the tax treatment of investor housing…tends to encourage leveraged and speculative investment,” and that “housing is a potential source of systemic risk for the financial system and the economy”.
The RBA is usually reluctant to comment on areas of government policy outside its remit and hasn’t expressed any views on whether changes are needed to the long-standing tax treatment of housing investment. However, in response to a Productivity Commission inquiry 12 years ago, the RBA pointed out that:
“…taxation arrangements in Australia are more favourable to investors in residential property than are the arrangements in other countries.”
It also went on to note that a higher share of Australian taxpayers are attracted to property investment to lighten their tax burden and reducing investor demand would allow for more demand from first home buyers, without adding to the overall pressure on demand and prices. The RBA submission suggested this could also lead to a more stable housing market.
At that time, housing investors accounted for just over 45 percent of all lending by Australian financial institutions. In 1999 this was less than 32 percent, when the Howard government amended the tax treatment of capital gains in a way that made it more generous to investors (in property and other assets).
After falling back to around 36 percent in the aftermath of the global financial crisis, the share of property loans taken out by investors rebounded to more than 50% in the first half of 2015. The Australian Prudential Regulatory Authority (APRA) has since required banks to tighten their lending standards for property investment loans, now the share of new housing loans going to investors has fallen back to about 45 percent.
The key point to note here is that the changes enforced by APRA to banks’ lending criteria have also had the effect of dampening investor demand, as Labor’s current policy also intends, without any obvious adverse effects on property prices.
The government’s strict enforcement of foreign investment regulations, designed to prevent foreigners from purchasing established properties (other than in limited circumstances), and the cutting of grants to first-time buyers of established properties while boosting grants to first-time buyers of new dwellings at a state level, have both failed to dampen investor demand for property.
In other words, governments are trying with these policies to reduce demand for the purchase of established dwellings (90% of borrowing by Australian property investors is for the purchase of established dwellings) while encouraging the demand, and therefore building of, new properties. This is exactly what the Opposition’s proposed changes to negative gearing and the capital gains tax discount seek to do.
Labor is trying to make it less attractive for investors to buy an established property after 1 July 2017. As a result, the prices of established dwellings should go up at a slower rate than it would otherwise – and from the standpoint of would-be home-buyers, this is a good thing.
However, the Opposition proposes to “grandfather” existing negatively-geared investors from these changes. This means anyone who has a negatively geared property investment as of 30 June 2017 will still be able to offset the excess of their interest costs over their net rental income against their other taxable income. So there is no reason to expect that investors will seek to sell their investments en masse and that prices of existing properties will fall any more than they have done as a result of the other government measures.
And this is precisely what the memo from the RBA notes:
“only if changes were not grandfathered” would there be a risk of “large scale sale of negatively geared properties.”
The RBA note also raises the possibility that changes to negative gearing could prompt a “potential increase in rents” – a point which the Coalition has been as quick to seize upon. Presumably this concern reflects an assumption that if changes were to be made to existing negative gearing arrangements, those changes would apply to new properties as well as established ones (since the Financial System Inquiry whose recommendations prompted this staff memo didn’t make any distinction between the two).
The Opposition’s policy is to keep existing negative gearing arrangements for investors in new dwellings. There is a risk that it could end up inflating builders’ profit margins, rather than boosting the supply of new housing.
However, to the extent that it does the latter, there is less reason to expect rents to rise. This is because under the Opposition’s policy more would-be home-buyers could fulfil their aspirations. It would reduce the competition they face from investors who negatively gear and this would decrease the demand for rental housing.
The Reserve Bank hasn’t explicitly supported Labor’s negative gearing policy. But it does appear to have rebutted one of the government’s principal arguments against it.
Saul Eslake is vice-chancellor’s Fellow, University of Tasmania and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/saul-eslake-665" target="_blank">here</a>.
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What the RBA memo really says about negative gearing: Saul Eslake

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Aussie John Symond has warned of a potential recession if Labor's plan to limit negative gearing to freshly constructed dwellings goes ahead, calling it "frightening" in an appearance on Seven's Sunrise program on Sunday. 
"Who knows? I don't know whether prices will drop 10 percent, 20 percent or more," he said.
The property tycoon and founder of Aussie Home Loans predicted a slide in home prices under Labor.
"It is frightening and it will frighten others . . . and it creates this stampede. And that's my concern that there could be a glut of properties come on the market, force the prices down, and then all of a sudden it could be Armageddon with the housing industry that's propped up the Australian economy the last four years."
Symond joins another industry leader, Stockland boss who expressed a similiar recession fear last week. 
Mark Steinert, chief executive of Australia's largest residential property developer, Stockland, believes Labor's housing policy has "the potential to destabilise the entire economy" – to the extent of "risking a recession".
"At the end of the day, house prices are unlikely to adjust so much that it would really change that affordability equation anyway," Steinert told the Australian Financial Review.
"And if they do, believe me it won't be a recession. It will be a depression."
Steinert told columnist Jennifer Hewitt property is such a major force driving Australian growth and activity, that even a small change in the market and in sentiment flows through the entire economy. 
"Housing represents $6.5 trillion of the Australian people's wealth," he told The Australian Financial Review. 
"It is so big and so many people are involved that even when that order of magnitude of change is obviously small compared to the stock market…its affects people.
"It becomes the new dinner party conversation.
"People feel poorer. 
"They buy less in the shops and people employ less and people are less willing to borrow money to start a business and suddenly that goes on.
"That is how markets work.
"The only way you deal with affordability in my view is first and foremost about supply…in a structural way.
"You cannot deal with affordability in a manageable way by de-stabilising the largest asset in the country."
Symond's fears were dismissed by Labor's shadow parliamentary treasury secretary and western Sydney MP, Ed Husic, who called them "outrageous", according to a report in the Sydney Morning Herald.
"It's a shame that Malcolm Turnbull and John Symond have teamed up to look after their interests, having done very well for themselves, when there are so many people in my part of Sydney for example, who are trying to buy a first home but cannot," he said.
Turnbull called Symond an authority on the property market at a recent forum in Sydney, the report in the Sydney Morning Herald said.
"As you've heard today from the Real Estate Institute, from John Symond - from Aussie John - that is going to have the impact of putting up rents and reducing the amount of rental property," he said.
A campaign against Labor's change by many of the country's most prominent real estate firms and Coalition supporters uses a website to warn of "disastrous consequences" if negative gearing is crimped.
"Our industry participants pride themselves on being apolitical, but this time, the issue is far too important not to speak out," it states.
Labor has announced it will limit negative gearing to new housing from 1 July 2017 as part of it tax overhaul.
Labor says negative gearing and the capital gains discount have not achieved their aim to boost housing supply and instead will cost the budget over $10 billion this year, more than what the government spends on higher education or child care. It also claims it mostly benefits the top income earners.
 
{mijopolls 142} 
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