The Morrison government’s ardent defence of negative gearing may have helped return it to office at the last federal election, but the policy is only making housing affordability worse, according to the Reserve Bank of Australia (RBA).
Fronting an inquiry into housing affordability and supply, RBA officials didn’t pull any punches when it came to one of the key battle lines in the 2019 election, as well as capital gains tax (CGT) discounts.
“The [Reserve] Bank has always held the view that the combination of negative gearing and concessional capital gains tax – and indeed the way we tax older Australians or don’t tax older Australians – combines to encourage essentially speculative investment in property,” RBA assistant governor Luci Ellis said.
The controversial policy allows investors to use any net rental losses to reduce their tax burden, essentially seeing taxpayers compensate them for holding a loss-making asset.
While originally intended to boost the available housing supply by encouraging new construction, the policy now disproportionately enriches the highest-income bracket – and upwards of 14% of all federal ministers – as property prices have soared.
It has meant that whatever its intent, the policy could be simply exacerbating risks within the market.
“It probably means that at the margin, rents are lower for some households who rent but it does add a speculative dynamic to the market. That is something that we’re quite concerned about, given our financial stability mandate,” Ellis said.
It isn’t just Australia, either. New Zealand this year killed off its own version of negative gearing as it desperately tries to tame house prices.
Housing affordability policies have failed
It comes as runaway house prices, record lending growth and sky-high household debt become of increasing concern for the central bank and fellow regulators, as they look to tighten the credit tap.
The Reserve Bank says it continues to monitor these trends “carefully”, as record low interest rates continue to lower borrowing costs. Yet its Board Members also appear frustrated that there is little they can do structurally about the increasingly concerning issue.
Governor Philip Lowe on Tuesday put the onus back on governments, with his fellow board members going further still and telling the federal government it had actively helped make affordability worse.
“You don’t increase affordability by giving people more money to spend on housing,” Ellis said.
It echoes criticisms made by economists across the board which have pointed out that government policy, from first home buyer grants to the proposed opening up of superannuation, only raises prices.
Solutions to Australia’s property problem
There is, unsurprisingly, no single solution to what has become a complex and very hot market, with some experts demanding nothing less than a royal commission.
Building more housing, for example, could help ease price growth but isn’t a silver bullet, Ellis said.
“More expansive supply will help but in the face of a large increase in demand, it will only help. It will not eliminate the increase in house prices,” she said.
Instead, federal and state governments need to “see the housing market holistically”, with “different submarkets” being affected by different factors.
Harking back to negative gearing, Ellis said there were a number of policies that needed to be overhauled at both a federal and state level.
“We believe the tax system is worthy of review, but not one feature in isolation,” Ellis said. “It requires a holistic review in order to get the right combination of parameters so that the treatment of income-producing assets in the tax system doesn’t have deleterious effects on other elements of the public interest.”
Lowe separately echoed that call, adding the design of “social security systems, the planning system, zoning restrictions, the type of dwellings that we build, and the nature of our transportation networks” to the ever-growing list.
“It’s okay for a while for credit to be growing much faster than income but given the very high level of debt we already have, my view is that it’s not going to serve our collective interest to have debt rising at 10 or 11 or 12% a year when incomes are growing at half that,” Lowe said.
As prices soar, it has become a financial stability issue the central bank can’t simply ignore. Yet, at the same time, the governments that could address it have actively and knowingly made it worse.
With the majority of voters registered as homeowners and with home ownership disproportionately high among MPs, however, it may be a lack of appetite rather than knowledge that’s holding reform back.