Talk about killing negative gearing is like elevator music in our national debate. It is ever-present and we’ve tuned it out.
But there will never be a better time than now to rip negative gearing from the tax code. That’s because right now investor activity in the housing market is a major macroeconomic problem.
The RBA would love to cut official interest rates – if it weren’t for the strength in housing. It is worried trimming the interest rate even more could create further mad results, like this terrace house around the corner from me that sold for $1.96 million.
This is what Glenn Stevens said last month.
“A situation where:
- prices have already risen considerably in the two largest cities (where about a third of our population live)
- prices are rising, at present, faster than income by a noticeable margin, and
- an important area of credit growth has picked up to double-digit rates,
should prompt a reasonable observer to ask the question whether some people might be starting to get just a little overexcited.”
The strength in housing is very much on the investor side, not the owner-occupier side.
And the rest of the economy is in a morass with unemployment moving sluggishly higher.
If the strength of the housing market was more in line with the rest of the economy, rates would fall like a tonne of bricks. Reducing investor demand for housing could give the RBA the freedom it needs to cut rates to the point where the economy picks up.
In summary, this is what the experts call a policy window.
If there was ever a time where scrapping negative gearing (on existing homes at least) was going to fly, it would be when the topic is macro-economically important.
Negative gearing has haunted the Australian policy landscape since 1985, doing much to enrich property investors while having an altogether ambiguous effect on the social outcome it was designed to address – housing affordability
A brave treasurer would reach back to the Henry Review and say, ‘ in order to reduce the policy bind the rba finds itself in, it’s high time we looked at this recommendation.’
The Treasurer would find plenty of backing in the Henry Review. It did not argue that cutting negative gearing would cause an immediate reversal in house prices. But it did point out that the policy represented a big fat subsidy, and recommended something a lot more modest.
“When negatively geared, asymmetries in the treatment of expenses and receipts give rise to a more favourable treatment (see Chart A1–20). This asymmetry ranks amongst the greatest tax induced biases to the savings choices of households. “
The beat of the drums against negative gearing will never be louder than now. Let’s see if policy makers can hear them.