Negative gearing - reform for the greater good
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Proposed changes to negative gearing policy by both the Government and Opposition in a bid to aid struggling first home buyers are misconceived and not based on the reality of what is happening in today’s property market.
While some level of negative gearing reform may assist our economy, significant changes are likely to only cause pain to the same group of disadvantaged property buyers they are trying to help.
The admirable intention of the Government acting as a modern-day Robin Hood, denying the wealthy investor to assist the first-time buyer, is undeniable. Yet it is based entirely on a misconception and is completely out of touch with the reality of the dynamics of today’s residential property market.
The current slowing but still hot property market has seen prices rapidly escalate with homes out of reach for first home-buyers and the median price beyond $1,000,000 in many metropolitan suburbs. Naturally, Sydney leads the pack with disproportionate increases by comparison to other states.
According to RP Data, Paddington in Brisbane has a median price of $1,000,000 compared to Paddington in Sydney’s $2,309,900 – yet both are five kilometres from the CBD.
What the proposed changes to negative gearing do not factor in is the reality of what this rising property market has meant for first home-buyers and the different strategies they have needed to pursue to get their foot onto the bottom rung of the property ownership ladder.
Unaffordable property prices have shattered the dreams of many first home-buyers. In a lot of cases, it simply makes better financial sense for the first home-buyer to become a first-time investor instead.
For the vast majority of would-be first home-buyers, by first being an investor they can reap the tax minimisation benefits of negative gearing and start to build some equity in their property by renting it out for a few years before eventually moving into it themselves.
Other first home-buyers look at tactics like investing interstate or in a more affordable area to build equity so they can eventually sell the investment property and buy their own home.
This “invest-to-own” strategy is becoming more and more commonplace in capital cities like Sydney and Melbourne where rapidly escalating property prices have made live-in home ownership unaffordable.
Buyers are instead looking to growth locations in regional cities as a way of getting their foot into the market and riding the wave of more rapid growth than capital cities.
According to CoreLogic, Geelong had a median dwelling value of $507,202 at the end of 2017, while Ballarat’s figure rose 5.5 per cent year-on-year to $337,710. In comparison, Melbourne’s median property value rose 8.9 per cent to $720,417.
Significant changes to negative gearing policy are unlikely to have a large impact on wealthy investors with portfolios of multiple properties as these investors frequently have either positively geared or cash neutral financial positions.
Lenders also have risk protected when lending to portfolio investors securing larger deposits of at least 20 per cent from these investors, who also need to prove annual income of at least 20% of the total value of their property loans.
Australia could look to other examples around the globe to see ways in which negative gearing could be modified, and this could be done in a way to preserve the benefits for those who need it most.
South Africa offers a strong middle-ground position where negative gearing is ring-fenced against an investment property’s income. Losses can be carried over into future gains under the South African negative gearing model, but only from the same individual property. Properties within an investment portfolio are not evaluated en-masse but as individual assets.
Our Government needs to avoid making rash, drastic changes to the way negative gearing works within Australia and get its finger on the pulse of what the rising market has meant for first home buyers and how lending has changed as a result. Rather than making blanket assumptions, we need to look globally and identify successful models that Australia could use elements of to reform negative gearing for the greater good.