Tax Incentives: A Significant Advantage to Property Investors
If you have participated in a BBQ with family or friends, property investment can be an uncomfortable topic when it comes to housing affordability. The disparity arises where younger buyers express concern about being ‘priced-out’ of the market because of investor tax incentives.
One of those tax incentives is negative gearing, which essentially means any losses a housing investor makes on the shortfall between rent and interest will be offset against other income — and covered by the taxpayer.
Speaking of this dynamic, Tim Lawless of CoreLogic said there were some ways to scale it back if any politician is game to try.
“Speaking from a more personal perspective, I think there is room to change negative gearing policies, perhaps capping it at two properties or less than three properties, or capping the total amount that you can negative gear will be much more palatable to voters.”
Mr Lawless said this may help to reduce the number of investors who have “a significant stable of investment properties that have treated it much more like an investment class than the housing asset itself.”
Another possible tax reform would be adjusting capital gains tax concessions which allows investors who hold a property for more than two years to get a 50 per cent concession on that tax when they sell it. Removing that might disincentivise investment in the property market, Tim Lawless said.
Though like negative gearing, tinkering with capital gains tax hasn’t proven a very popular political pursuit. “The Labor government did have a policy of changing negative gearing policies and capital gains tax concessions, and they seemed to lose from an unlosable position. So I think most politicians will be quite cautious in adjusting these types of policies,” Mr Lawless said.
Economist Professor Rachel ViforJ said another approach could be winding back stamp duty, which is the State tax someone pays when they purchase a house.
Instead, she proposed replacing it with something like an annual State land tax “that is not an up-front cost that people have to pay upon purchase, but it’s an annual tax that they actually pay on the value of the land year after year after year, but not in a lump sum.”
Tax reform isn’t the only option: experts
Aside from tax reform, the supply of housing clearly needed to be increased to meet demand, Professor ViforJ said, however that needed to include sufficient social housing. “We do need to build new properties across the income and wealth distribution,” she said.
“But we do need to make sure that we have a focus as well on people who are at the bottom end of the distribution, we’re finding it difficult to access housing.” Tinkering with negative gearing or the capital gains tax hasn’t proven a very popular political pursuit.”
“The supply of social housing has not kept up with the demand for it over a very long period of time now, which means that we are actually getting larger numbers of people who are slipping into homelessness.”
Professor ViforJ said there were many options on the table to improve housing affordability and the reality was many of them would need to be used together as there was no silver bullet solution.
Mr Lawless said other shorter-term solutions included government grants such as the boost to the first home owners grant after the global financial crisis, which led to a surge in house sales.
“But as soon as that stimulus was removed, we saw our first home buyer activity fall to below what it was pre stimulus. So I think that there’s a really good argument here that those sort of policy initiatives, those stimulus levels don’t really do a great deal for home ownership in the long run, and arguably pushes prices higher.”
Instead, Mr Lawless believes the problem is best tackled by increasing housing supply. As for the outlook for the year ahead, Mr Lawless believed the numbers are only going to go up.
“I think the outlook for the housing market is it probably is further growth through the rest of this year and into next year. And arguably, if we did see interest rates coming down later this year, that could add a little bit more exuberance to housing activity.”
While Mr Lawless doesn’t believe the number of housing investors will rise this year, Professor Viforj believes it might.
“I think that as long as the rental vacancy rates are remaining, so low below 1 per cent, we will continue to see the amount of housing investment rise over the coming year. And I think that would especially be the case if interest rates start to fall.”