Negative Gearing is not the problem

Negative Gearing is not the problem

In a recent series of articles in the Sunday Times, Master Builders Australia CEO, Wilhelm Harnisch, discussed some of the reasons for Australia’s housing shortage and in particular how it’s a falsehood to think the solution will come from tinkering with negative gearing. Here’s some extracts from the series:

What should governments do?

The key policy objective for all governments must be to ensure affordable housing is available for all Australians. The problem is homeownership is increasingly moving out of the reach of more and more Australians. Tinkering with particular taxes will do very little, if anything, to address the core reason behind deteriorating affordability and the downward trend in ownership –which is a lack of supply.

Taxation is not the major constraint

Importantly, the pros and cons of tax policies such as capital gains, the exemption for owner-occupiers, negative gearing and stamp duties should be considered in the widest possible context. Australia’s Future Tax System Review (the Henry Review) provided, less than five years ago, an exhaustive examination of housing-related taxation. Another opportunity for a wide-ranging review will be provided via the Government’s White Paper on the Reform of Australia’s Tax system. The Henry Review stated categorically that the taxation treatment of housing is not the major source of supply constraints in the Australian housing market.

Fix supply first, then look at taxation

Instead, the review recommended that any reforms designed to change the tax treatment of investor housing should only be considered once the housing supply issue has been resolved. The Productivity Commission has noted that “quick fixes” – such as limiting negative gearing or removing the capital gains tax discount for housing – could detract from, rather than promote, more efficient investment. The problem is not on the demand side.

Policies are limiting supply

Rather, policy failings limiting the supply of housing to meet demand lead to higher prices and worsening affordability. The cost of a family home has increasingly become unattainable as supply-side bottlenecks and inefficiencies work against an average household realising the goal of affordable ownership.

The following examples highlight this:

• Shortage of available land and inefficient land-release strategies.
• Infrastructure costs being loaded on to developers and, in turn, passed on to homeowners; excessive infrastructure specifications in subdivisions; excessive development levies; taxes and charges imposed by state and territory governments.
• Excessive planning and building requirements; increased regulations pushing codes and standards higher than required; uncoordinated local and state government environmental regulations.

The supply side issues must be dealt with. That was a key finding of the 2010 Henry Review –Australia’s most comprehensive review of taxation in more than a generation. It made the point that only when the problems on the supply side have been fixed should the focus shift on to economy-wide saving and investment taxation issues, including negative gearing. Governments of all persuasions have to be part of the reform process. Master Builders has been urging the Federal Government to facilitate national competition-style incentive payments designed to encourage states to remove supply side impediments; and to make a difference in the areas of land release, developer charges and the development application process.

Extracts from Master Builders Australia CEO, Wilhelm Harnisch series of articles in the Sunday Times