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Most of the media headlines about Tuesday night’s federal budget changes to negative gearing and capital gains tax focus on how it will impact property investors rather than homebuyers. It suggests that our “national ?obsession” has changed from being a homeowner (with a backyard big enough to swing a cricket bat and have a barbie) to using property “as the primary way to build wealth”.
Perhaps that cultural change is true (sadly) – there are any number of online influencers pushing the investment line – but it’s a load of misleading nonsense about the budget.
The key point (that receives only passing mention in most coverage) is that the budget changes do not apply to new-build houses, which remain unchanged.
So “mum and dad” investors can still go down the build-wealth-through-property route by buying a rental property or two, they just have to be new-builds.
It’s also worth pointing out that many of the people taking advantage of these tax rules are not in the mum-and-dad category, they are professional investors owning 10s or 100s of properties, plus they are more likely to be running at a loss than people with a few houses and hence get immediate benefit from the negative gearing. As Greg Jericho from the Australia Institute recently noted: “We’ve got a system that is actually assisting people more to buy their 10th property than their first.”
These tax rules have always been controversial. Negative gearing has been around since 1936 when it was introduced to “encourage wealthier Australians to invest in housing, thereby increasing supply and helping stabilise rents… as economic hardship was putting the Great Australian Dream of home ownership beyond many”.
They are described as “unusually generous” in a 2015 report by the Australian Council of Social Service: “Unlike most wealthy countries, including the US and UK, our income tax system places no limit on deductions that can be claimed for investment expenses relating to rental properties and other investments producing capital gains such as shares and agriculture.”
The purpose of any tax rule (beyond just collecting money for the public purse) is to incentivise financial behaviour that is beneficial to the tax-paying individual as well as the nation as a whole. Encouraging investment in new-builds is fundamentally different to buying existing houses because it encourages the construction of new stock rather than reallocation of existing stock – there is supply-side industry stimulus not just demand-side financial speculation.
Building more houses is obviously beneficial to ease the housing crisis because lack of availability is one of its key drivers (affordability and poor quality are the others), but construction is also beneficial to our national economy, providing jobs and driving growth.
A report by the National Housing Finance and Investment Corporation promoted housebuilding as a way to rebuild the Australian economy post-COVID, stating that: “housing construction generates the second largest economic multiplier of all industries within the Australian economy, and that every $1 million injected into the residential building industry returns $2.9 million in GDP”.
As Prime Minister Anthony Albanese said on Channel Nine news: “what that does is not just invest in yourself but in the nation as well.”
What drove this politically contentious change? Quoting Greg Jericho again: “Once they won with such a massive majority, what really came out of that ?was not so much ?of a vindication of their election strategy, but pressure from voters to say, ‘hey, you don’t have any excuses anymore’.” Sydney Morning Herald journalist Millie Muroi described it as “bold” whilst renowned economic commentator Ross Gittens said the government was dealing with “some of these controversial problems.”
In these times of geopolitical upheaval we are desperately in need of some boldness to deal with controversial problems, so I will be ignoring those misleading headlines and bet on these changes being a winner for Aussie housing.
