Budget Night. What’s going to happen to negative gearing?

Real estate associations and economists sit on different sides of the fence on the rumours the government will reform Australia’s negative gearing rules in the 2014 Budget, announced tonight.

There have been reports the government will amend the controversial rules, by grandfathering arrangements for existing investors and only allowing negative gearing on newly constructed dwellings.

Both the Housing Industry Association and the Real Estate Institute of Australia (REIA) believe any change to negative gearing would impact on the supply of housing and the level of rents in an already tight rental market.

“To amend the current negative gearing provisions for housing would be treating real estate differently to other asset classes, create a distortion on the investment landscape and result in a resource misallocation,” REIA president Peter Bushby said.

“The view that negative gearing is for wealthy investors is a myth. ATO data shows fewer than 80% of the total individual taxpayers that are claiming a tax deduction for property earn less than $80,000 a year.”

He believes a change to negative gearing could result in rents rising by more than 4%.

RP Data’s Cameron Kusher said negative gearing is in place to encourage developers to build new rental accommodation and private individuals to act as landlord for those who are not in a position to own their own home.

“While it would make sense to apply negative gearing only to newly constructed properties, politically it would likely be unpopular. Furthermore, if negative gearing was to be removed the government would likely have to play more of a role in constructing new homes and managing a portfolio of properties.

“On balance, they probably see that foregoing almost $8 billion in taxation revenue is more cost effective than developing and managing a greater proportion of new housing stock,” Kusher said.

But according to Grattan Institute research, quarantining negative gearing losses would save the budget around $4 billion per year initially and fall to a saving of around $2 billion per year over the longer term.

Its report also showed that negative gearing was not producing much-needed new affordable housing.

Economist Leith van Onselen has argued many times on his blogagainst retaining negative gearing, especially on the grounds of rental supply.

“A large scale sell-off by investors would be met by purchases from renters (i.e. first home buyers). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged,” he said.

Property Asset Planning managing director Brian Chant would also support changes to end negative gearing on established property and allow it only for new dwellings.

“In the last 25 years negative gearing has done little to boost supply of rental accommodation or improve affordability.

“Not only would proposed changes to negative gearing improve the budget’s bottom line, stimulate the building industry and address the shortage of rental accommodation where it’s needed it provides a great vehicle for people wanting to become self-sufficient in their retirement through investing in brand new [property].”

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