Posts Tagged‘first home buyer’

Think Negative Gearing is to Blame For High House Prices? Think Again.

Before I dig my hooks into the reasons why negative gearing isn’t to blame for high house prices (a seemingly controversial view these days) I will tell you, in the interests of full disclosure, that I’ve been negatively gearing property for the past 5 years or so. Back when we first bought our property I lamented the dearth of good properties that were available in our price range, focusing much of my anger of the property boom that took place mere years before we went into buy. However we found something that we could just afford if we played our cards right, even though it was out in the sticks of Canberra. During that time though I never once blamed the negative gearers for this predicament but the more I talk about it the more it seems my generation blames investors for it when they should really be looking elsewhere.

Negative Gearing Income 2010-11

Depending on what figures you’ve read though I’d find it hard to blame you like the table above (from this ATO document) that has been doing the rounds lately. On the surface it seems pretty hefty with some $7.8 billion in total losses being claimed by investors with negatively geared property. Realistically though the total cost to the government is far less than that as even if everyone was on the top marginal rate (which they aren’t, most are on $80,000 per year or less) the total tax revenue loss is closer to  $3.5 billion. Out of context that sounds like a lot of dosh, especially when this year’s budget came in at a deficit of $18 billion, but it’s like 0.9% of total tax revenue which is significantly dwarfed by other incentives and exemptions. If your first argument is that it costs the government too much then you’re unfortunately in the wrong there, but that’s not the reason I’m writing this article.

The typical narrative against negative gearing usually tells a story of investors competing against homebuyers (usually first timers), driving up the price because they are more able to afford the property thanks to negative gearing and the higher amount of capital that they have. Whilst I won’t argue that this never happens it fails to take into account the primary driver for upward trending house prices: owner occupiers. Initially this idea sounds ludicrous, since homeowners aren’t taking advantage of negative gearing gains nor are they in the market for new property, but the thing is that the vast majority of capital gains in Australia are held by just such people, to the tune of 84% of the total property market.

In Australia the primary mechanism which drove house prices up, with most of the increase occurring between 1994~2004, was current home owners upgrading their houses. For a current homeowner  especially ones that own their property outright, the cost of upgrading to a larger property is a fraction of what it would cost to buy it outright. However anyone looking to upgrade will also try to extract the maximum amount of value out of their house in order to reduce the resulting loan and thus the cheaper priced houses get pushed up as well. Couple that with the fact that the majority of Australian owner/occupiers move at least once every 15 years and that selling your primary place of residence is exempt from capital gains tax and you have a recipe for house prices going up that’s not predicated on negative gearing’s influence.

Indeed the ABS Household Wealth and Wealth Distribution supports this theory as the average value of an owner occupied property is $531,000 which is drastically higher than the Australian average (which includes all investor properties) at $365,000. Considering that the bulk of the Australian property market is dominated by owner-occupiers (since investors only make up 16% of it) then its hard to see how they could be solely responsible for the dramatic increases that many seem to blame them for. Most will retort that investors are snapping up all the properties that would be first home owners would get which is something I can’t find any evidence for (believe me, I’ve been looking) and the best I could come up with was the distribution of investment property among the 5 sections shown here which would lead you to believe that the investors are normally distributed and not heavily weighted towards the lower end.

The final salvo shot across the negative gearing bow usually comes in the form of it providing no benefit to Australia and only helps to line the pockets of wealthy investors. The counter argument is that negative gearing helps keeps rent costs down as otherwise investors would be forced to pass on the majority of the cost of the mortgage onto renters, something we did see when negative gearing was temporarily removed. Indeed the government actually comes off quite well for this investment as using that revenue to instead build houses would result in a net loss of rentable dwellings which would put an upward pressure on rents.

I completely understand the frustration that aspiring home buyers go through, I went through it myself not too long ago when I was in a position that wasn’t too different from average Australian. But levelling the blame at investors and those who negatively gear their property for the current state of the Australian property market is at best misguided and at worse could lead to policy decisions that will leave Australia, as a whole, worse off. You may believe to the contrary, and if you do I encourage you to express that view in the comments, as the current Australian property market is a product of the Great Australian Dream, not negative gearing.