Over a million people on low incomes experience housing stress, with a whopping 30 percent of their income accounting for housing costs. Photo: Louie Douvis
As the housing market heats up, the elephant in the room remains tax reform, including tax breaks for geared property investments.
Australia has a severe shortage of housing, with half a million more homes needed for people on low incomes. We are also relying on housing construction to pick up the economic slack from the phasing-down of the mining boom. Yet even at this early stage in the housing recovery, there are concerns the market is overheating. House prices in Sydney have risen by 9 per cent since the start of the year.
It's too early to say whether this is another house price bubble in the making but if it is, it would extinguish the hopes of low- and middle-income home buyers and tenants.
We've been here before. Between 1996 and 2004, house prices rose by about 80 per cent in real terms. This was largely driven by a surge of borrowing to invest in rental housing. The proportion of taxpayers with an investment property doubled over the decade to 2004, reaching 17 per cent in that year. House prices rose because of land shortages, easier access to bank credit and generous tax rules for property investors.
Property spruikers convinced many people the best path to a comfortable retirement was to take advantage of easy credit, offset the expenses against their wages, and ride the property boom in search of concessionally taxed capital gains.
Easy credit, rising house prices and tax breaks are a heady mix. It's time to look seriously at tax policy, which is a large part of the problem.
It was no accident that the last residential investment boom followed a government decision in 1999 to halve capital gains tax rates for individual investors while leaving negative gearing rules intact.
The vast majority of negatively geared housing investment is in existing properties. Prospective owner-occupiers were displaced from the market and tenants were eventually squeezed by higher rents when supply failed to keep up with demand.
Expensive housing is by far the main cause of cost-of-living pressures in Australia. More than a million people on low incomes are experiencing housing stress, spending more than 30 per cent of their income on housing costs, with the majority in private rental. The solution to our housing affordability crisis is to divert investment into new, lower priced homes and remove bottlenecks from the supply of such housing, especially in our cities.
Instead of encouraging individual investors to borrow to the hilt to buy existing houses, the tax system should encourage them (and, better still, institutional investors) to build new ones. The Henry review of taxation recommended our unique system of unlimited tax deductions for loss-making property investments be scaled back. If part of the savings were used to encourage investment in new affordable housing, for example through an expanded version of the National Rental Affordability Scheme, then the tax treatment of property investment could be part of the solution rather than part of the problem.
Rules allowing self-managed super funds to borrow to invest, and to dispose of assets without paying capital gains tax, should be reviewed. The superannuation system should grow savings, not debt. And state governments could tax land more and property transfers less, as the ACT government does.
In tax policy, timing is (almost) everything. In the 1980s Treasurer Paul Keating cut back tax concessions for geared property investments just as a housing boom was coming to an end. It was higher interest rates and a shift of investor preferences to shares that killed off that boom, not the curbs to negative gearing, but a myth was born.
If the subsequent government had curbed deductions for investment in property and shares in 2000 instead of cutting taxes on capital gains, it could have taken some of the steam out of the property boom that followed, and people would have called it sensible economic management.
That hissing sound suggests now may be a good time to revisit this issue as part of a tax reform process.
Simon Schrapel is the president of the Australian Council of Social Service.