Topic: Ahead of next week’s economic reform roundtable, the question of whether to scrap or heavily reform negative gearing has been raised by politicians, academics, the media and unions. Would this tax approach help tackle Australia’s housing affordability crisis, or would it avoid its structural problems and risk making them worse?
Question: Should we scrap negative gearing?
Debaters: The Australia Institute’s chief political analyst Amy Remeikis is arguing the affirmative. RMIT Professor and IPA adjunct research fellow Sinclair Davidson is arguing the negative.
The following is Amy Remeikis’ view. Read Sinclair Davidson’s here.
We have all heard the story — the way to build wealth is to buy an investment property and then have that property create passive income for you.
It was never supposed to be that way. A home was supposed to be somewhere you lived — not a driver of wealth — and a rental property was a step towards homeownership. But thanks largely to John Howard and his drive for a “relaxed and comfortable” voting population, a home went from somewhere you lived to your source of wealth.
If you owned more than one, well, you were living the absolute dream! And if that meant someone else couldn’t own a home, well, that is just on them — perhaps they should stop buying all that avocado on toast and fancy coffee and just eat at home like you did.
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Never mind that the minimum wage would need to be somewhere near $66 an hour to match the purchasing power of the 1970s. Never mind that homes are now 14 times the average income, as opposed to two or three times when your parents and grandparents were buying. Never mind that rentals, the supposed cheaper option, have also outstripped incomes and are almost entirely out of reach for someone on benefits. Just stop all that avocado toast! That’ll fix it.
Until recently, the boomer generation was the largest and most powerful voting bloc in Australia. Our policy still reflects this, with politicians struggling to adjust to a changing of the generational guard. That has meant the housing market has continued to balloon in price, largely unchecked, with politicians unwilling to upset the generation that, for the past four decades, could make or break them in government.
We’ve all heard the story: Labor tried to do something in 2019 and was punished, so now it can’t do anything at all. Scare campaigns from the right-wing press, the Coalition and Labubus (probably) will come for it — and Labor just can’t risk spending its political capital when it needs it for not acting on a genocide or the climate crisis and for legislating policy by FM radio.
But Labor can, and probably without losing too much of that political skin of which it is so fond, even as it holds a record majority and faces an opposition so irrelevant it is unlikely to make it through its wilderness years as an alliance.
Scrapping negative gearing has understandably been a main focus of those concerned with housing affordability, but on that, the ship has probably sailed. There is an emotional attachment to negative gearing, cemented by decades of people being told that spending more on a home you don’t live in than you derive from the passive income of your tenants is the key to growing wealthy.
During the pandemic, when interest rates were as close to zero as the Reserve Bank could make them, the cost of negative gearing on the budget fell — understandably; it is hard to claim you are making a loss as your mortgage rate fell (though somehow rents still managed to increase). After the pandemic, interest rates were hiked, sending investors back into negative gearing territory.
But by and large, the capital gains tax discount — which should be tarred as the measure largely responsible for the housing affordability crisis — escapes most of the notice. That’s by design. Negative gearing is for the small-time investor — those mums and dads we always hear about whenever someone tries addressing Australia’s unfair and frankly ridiculous tax system.
But the capital gains tax discount is the final boss. It’s for the speculators, those who gamble on ballooning house prices. It’s not in making a loss; it’s in betting that the price of your investment will continue to grow and that you’ll get half the capital gain tax-free when you cash in on that growth.
If I sold my labour for $100,000, the government would tax me, even as I add valuable things to the economy. If I sold my investment property and made $100,000 above what I paid, the government would give me a tax break, even though I’ve added nothing new to the nation.
Make. It. Make. Sense.
You never hear about addressing the capital gains tax discount because it’s what actually makes money for the serious housing investors — the speculators, gambling on a market that continues to grow more unaffordable. No-one wants you thinking about that. Much better to keep people focused on negative gearing and the emotional attachment we’ve been conditioned to have to aspiration. But if you take care of the capital gains tax discount, the negative gearing issue takes care of itself.
If property investment gamblers no longer win big when the market grows exponentially above inflation and income, then they’ll go bet their money elsewhere. Those houses don’t magically disappear; they become available to owner-occupiers.
When homeownership was at its highest — 70% or so in the 1970s — no-one was bemoaning the lack of rental property investment portfolios. People still made money. They just did it by betting it elsewhere on the stock market, not on the roof above your head.